IR35 reform which was introduced over two decades ago finally hit the private sector.
How will IR35 affect you?
With the new IR35 rules taking effect on 6th April, you may have a number of PSC (personal service company) clients affected by these reforms. While HMRC have promised to take a lenient approach in the first year, it is advisable that you and your clients prepare as much as you can now. With forward planning, your clients will be in a better position to prevent their employment status from changing.
The IR35 reforms being introduced are now placing the responsibility of assessing employment status on the employer, rather than on the contractors. As a result, some employers are avoiding the risk of making a mistake by banning the hiring of contractors entirely. However, this is a costly solution. Not only in terms of money but also in employee talent; many contractors not interested in becoming full-time employees will bring their services elsewhere.
Essential advice for PSC clients
Employers intending to keep contractors on or to hire contractors in the future will be planning for IR35 reforms and introducing an assessment methodology that is best for their workplace. Although the responsibility will be on the employer, a contractor can take action to strengthen their self-employed status.
To assess their employment status, a contractor can use the ‘Check employment status for tax’ tool of HMRC, link as follows: https://www.gov.uk/guidance/check-employment-status-for-tax. This contains HMRC’s judgement criteria, examining whether a mutuality of obligation (go to link https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm0543 for more information on mutuality of obligation) has arisen, how much control is being imposed on the contractor, what the overall picture of their PSC looks like, and much more.
To help achieve an ‘outside IR35’ ruling, here are some useful, but by no means exhaustive, steps you can advise your clients to take:
- Review the personal services contract:
There must be a contract in place between the PSC and their client (employer). Develop the self-employed aspects of the contract by not including a notice period, a set working address for the project, a job title, set working hours or overtime rates. The contract should include a detailed substitution clause. This should outline how the contractor is responsible for sourcing, hiring, and paying a suitably qualified substitute who can provide the same service if required.
- Change your payment schedule:
Rather than being paid monthly as an employee would be, switch to being paid upon completing the project or upon completing project milestones. A penalty clause can be included in the contract for failing to meet a deadline. This can help distinguish a contractor from an employee.
- Control how the work is delivered:
A contractor manages their own time and controls how and where the services are delivered. This should be reflected in the management of the project and in the contract.
- Alternate clients:
Upon completion of a project, it is advisable to alternate clients, rather than rolling into another project with the same client. This can avoid a ‘mutuality of obligation’ from arising.
- Set up a website:
To strengthen their position as a contractor, the PSC should have its own website. Having a strong online presence can help existing and prospective clients perceive the PSC as a legitimate business. A professional website gives people an easy way to contact you, allows you to showcase a portfolio of work, and helps to build client trust.
- Other sound business practices:
In addition to building a website, a contractor should engage in other sound business practices that reinforce their contractor status. This includes having a branded business (logo, letterhead, etc.), providing their own equipment, having professional indemnity insurance, and if possible, working for multiple clients at the same time.