If your business employs staff directly, or you’re self-employed, here are two types of contracts that will help you to clarify how your business operates, in order to avoid the risk of IR35 applying.
What emerges from the case law and guidance is that the contracts the parties have in place and the reality of these arrangements are highly relevant to whether a particular arrangement is caught by IR35 or not.
Whilst it is important to have contracts drafted in such a way to reduce the risk of IR35 applying to the individuals provision of service through an intermediary it is also important that the practical reality of the operation of such contracts is in accordance with those terms.
It will also assist in any determination of status under IR35 if it can be shown that the clauses indicating self-employment status have in the course of the agreement been exercised, for example if the individual can show that the right to provide a substitute has been exercised. How does HMRC determine employment status under IR35?
Having in place accurate contracts governing the relationship and arrangements between the intermediary and the client and the intermediary and the individual is imperative to reducing the risk of falling foul of IR35 legislation.
1. Contract between Intermediary and Client:
Traditionally the more scrutinised contract by the HMRC in any investigation, we would suggest any contract between an intermediary and client contain some or all of the following :
• A right of substitution – this should be drafted so that it is wide ranging as possible and should not be subject to a wide veto on part of the client;
• Avoid any obligation to provide and accept work;
• Not include a notice period which tends to point towards mutuality of obligation on client and intermediary indicating employment status;
• Intermediary should be subject to as little control as possible- should be free to set own hours and determine how work is done;
• Payment & Contract should be structured by reference to completion of a particular project or a piece of work;
• If possible build in element of financial risk in the contract such as penalties/bonus for late/early completion
• Include requirement for intermediary to maintain insurance;
• Require intermediary to provide its own equipment;
• State the relationship is not intended by the parties to be one of employment.
These will of course need to be weighed against the commercial requirements of the contract in question and how the contract will operate in reality on a day to day basis.
It should be noted that certain matters such as the requirement for a personal service by an individual will have more risk of the contract and the arrangement being caught under IR35.
2. Contract with worker
It is important to put an employment contract in place between the individual and the intermediary. Key to such a contract is that it is not linked to closely to one particular client of the intermediary. The individual under the contract should be obliged to provide service to whatever clients the intermediary requires.
The contract with the individual should as far as possible look like a standard employment contract with the intermediary as the employer and should:
• Avoid linking the amount of salary and benefits to the client the individual is providing services to – HMRC is less likely to look into an arrangement where a meaningful salary is paid in line with market rates than if the income is distributed primarily by way of dividends and the tax free limit of earnings paid as a salary.
• Specify the individual will be subject to the control and direction of the intermediary and that all disciplinary or grievance matters will be dealt with by the intermediary
• Specify matters such as taking leave or notifying of sickness absence should be with the intermediary
What are the consequences of IR35 applying?
• Sums received by the intermediary are, in effect, treated as employment payments by the intermediary to the individual for tax and NIC purposes and will therefore be subject to PAYE;
• All relevant tax and NIC consequences fall on the intermediary and not on the client. The intermediary will be liable to account to HMRC for tax and NIC they determine to fall due together with interest and penalties applied for any overdue tax or NIC.
Further points to note on IR35
• A determination by HMRC on IR35 does not in itself affect the employment status of the individual. An Employment Tribunal could well conclude that an individual who was caught under IR35 was not an employee. In practice it is highly unlikely however as the tests used to determine IR35 and employee Status are largely the same.
• Likewise a determination of HMRC that a individual is self-employed is not determinative of the workers employment status before the Employment Tribunal.
• If there is a direct consultancy agreement between an individual contractor and a client for the provision of services IR35 cannot apply as there is no arrangement involving an intermediary.
•The absence of an intermediary does not automatically mean that the individual’s consultancy agreement with a client cannot be deemed as direct employment, the Employment Tribunal are free to determine employee status on the principles set out in case law and upon a determination of a consultant as an employee the client would be liable for employers tax and NIC as well as for holiday pay and other employee benefits for the duration of any agreement.
If you have any questions or require any guidance regarding IR35 or Employment Law, please call Andrew Lester on 01785 223440 or email Andrew.Lester@orj.co.uk who will be more than happy to assist you.