The buzzword of the IT contracting world has been ‘IR35’ for what seems like an eternity now. However, with the IR35 regime tightening and increasing numbers of businesses looking at flexible, hybrid and gig economy staffing models, the focus is well and truly on this area. None more so than within the IT sector.
If you are looking to hire IT contractors and wish to know how to approach it or have contractors raising queries and are not sure how to answer them, then we cover some of the key considerations below.
What is IR35?
Also known as the ‘off-payroll working rules’, IR35
is a piece of legislation that was brought in to try and ensure that contractors contracting through their own companies (or other intermediary) pay approximately the same amount of income tax and National Insurance as an employee would if they were engaged directly with the client. These contractors are sometimes known as ‘disguised employees’.
Who does IR35 apply to?
Since April 2021, ‘medium’ and ‘large’ businesses have been responsible for deciding whether the IR35 rules apply to their contractors on a case-by-case basis. They join public sector bodies, who have been similarly responsible dating back to April 2017. If a contractor provides services to a ‘small’ business, then it is the responsibility of the contractor’s intermediary to decide their correct status and whether the rules apply to their situation.
What happens if the IR35 rules are deemed to apply?
If the rules are deemed to apply, then income tax and national insurance contributions must be deducted at source from the fees payable and paid over to HMRC (together with any employer NI contributions applicable) in much the same way as would be the case if the individual was a standard employee paid via PAYE.
What qualifies as a ‘Small’ business for IR35 purposes?
A business will be classified as ‘Small’ if it carries out business in the private sector and if it satisfies two or more of the following criteria, which are taken from the Companies Act 2006:
- it has an annual turnover not exceeding £10.2m
- it has a balance sheet total not more than £5.1m
- it had an average of no more than 50 employees for the company’s financial year
Unincorporated businesses and sole traders will only need to consider the turnover test.
A business may start as ‘small’ but if they break through the above threshold then the responsibility for determination will pass from the intermediary to themselves.
How do I determine the worker status of an IT contractor?
As a result of the complexity of modern contracting, there can be no absolute guarantee of correct worker status determination. Ultimately, the only true arbiter of correct determination is HMRC. However, the HMRC’s Check Employment Status for Tax (CEST) tool
demonstrates the factors that should be foremost in your thoughts when hiring IT workers.
Below is a brief overview of some of the most relevant factors from HMRC’s point of view.
- will the worker be an office holder (i.e. board member, treasurer, trustee, company director or company secretary)?
- will the worker have any management responsibilities?
- how will they introduce themselves to third parties such as consumers and suppliers (as working for you, working independently on your behalf, or working for their own business)?
- does the contract have a substitution clause?
- do you have the right to reject a substitute?
- would the worker have to pay their substitute?
Control and Supervision
- do you have the right to move the worker from their original task, or would that require agreement or a new contract?
- do you decide how the work is done? Or does the worker decide?
- do you decide their working hours?
- do you decide the working location?
- do you know which individual contractor will be carrying out the work?
Worker Financial Risk
- does the worker have to buy equipment, fund any vehicle or other costs (including non-commuting travel, accommodation of external business premises, etc) for this work before you pay them?
- will the worker be paid on a time basis, fixed project price or percentage commission split?
- would the worker have to put right mistakes at their own cost?
- will there be any paid-for corporate benefits such as gym memberships, health insurance or retail discounts, etc?
- does the contract stop the worker from doing similar work for other organisations?
- is the worker required to ask permission to work for other organisations?
- will the work take up the majority of the worker’s available working time?
- has the worker done any self-employed work of a similar nature for other clients in the last 12 months?
Ongoing contracting arrangements
- has the worker had a previous contract with your business?
- does the current contract allow for it to be extended?
- is the current contract the first in a series of agreed contracts with your business?
Managing contractors - status determination summary
The above factors help allow you to gauge whether the contract bears the hallmarks of a genuine self-employed, business-to-business relationship or whether it is more akin to an employment relationship.
The more a worker is taking on financial risk, having autonomy on their working methods, hours and location, not having guaranteed work or corporate benefits, servicing other clients, being paid fixed prices for fixed projects, and with the ability to substitute their services for those of another, then the greater likelihood they would be determined as self-employed, and therefore paid gross.
Likewise, if they are given personal roles with little autonomy, changing tasks under supervision, perhaps even with line management responsibilities, being paid an hourly rate or day rate, and with no financial risk, then the more it is likely that this would be determined as disguised employment and therefore the contract would be subject to deductions for tax and NI.
If you are in any doubt as to whether an IT Contractor is inside IR35 or outside IR35, would like a contract drafted, or are looking for general advice or support in this area, you should seek advice from your accountant on the tax issues and legal advice on the contractual and legal issues.
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