IR 35 review and how to stay out

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IR35 EMPLOYMENT VERSUS CONTRACTING

In this article we will detail some tips on how to stay outside IR35 but it is also worth reviewing the benefits of permanent employment versus contracting.

You may read the statement from Contractor websites that “To stay outside IR35 is crucial for the financial health of contractors”.   That statement is general in nature, some bias perhaps and is not true in all circumstances.  Of course there are many situations where it is far more worthwhile to be a Contractor but not always.  There are some considerations to take into account when deciding if it’s employment or contracting:

  1. It is sometimes possible to secure better pay in employment than through contracting.
  2. You can build a career and gain promotions.
  3. Better job security. (In the current climate we have seen some contractors laid off).
  4. You have to factor in the benefits of being employed;
    1. Sickness benefits.
    2. Holiday pay.
    3. Long Term disability (LTD).  Many larger companies have this scheme.
    4. Company Car
    5. Pension benefits
  5. We recently did a cost comparison for a Contractor who was thinking of taking a permanent position.  It worked out with all the employment benefits he would have to continue to earn a multiplier of 1.7/1 as a contractor to break even with the employment position he was being offered.

As Accountants, Tax Compute will always advise what is best for the client.  If you are thinking of leaving employment and going into contracting make sure you do all the sums.   Give us a call and we can offer you a free consultation and advice on what is best.   We will review any contract and make sure the right decision is made.

Contact for more information

Jon GUNNING
Cheltenham Office
jon@taxcompute.co.uk
Tel 01242 241998

ADVICE FOR STAYING OUTSIDE IR35

There is a fair amount of IR35 cases and judgements which will help in determining employment status (whether inside or outside IR35).  It is not exhaustive and nothing is certain in an IR35 case but we can discuss the main points and take a look at what you need to do to stay outside IR35.

  1. Have a Substitution Clause in your contract.  A big factor.  This is a clause that some Employers may not allow as in many cases they interview and select the candidate.   But If the Employer has the right to refuse the substitution there should not be any real opposition to the clause being included.
  2. The Contract must include the services you are providing.   This is important because the Employer could not make you undertake other tasks outside the contract.   So that is a clear distinction between Contractor and Employee.   Employees would be expected to undertake other tasks.   If you are renewing the contract make sure that there is some difference in the workscope.   That illustrates lack of continuity in the same role.
  3. Contract duration should be set as an estimate rather than a fixed term.  When you leave do not leave on the last day.   Again these subtle variances illustrate a difference to an employee contract which is fixed in nature.  
  4. Vary your hours of work in the contract.  A normal office will have say 9 to 5 Mon – Fri.   Make your hours of work longer say 8.30 to 5.15.   It does not mean that the Employer will hold you to those extra hours but it shows a contractual difference on the hours worked.
  5. Use Your Own Equipment and make sure that this is duly noted in the contract.  In a lot of cases you would probably be using Company equipment such as laptops etc… but using your own equipment from time to time will illustrate a difference between contractor and employee.  Employees are never expected to use their own equipment.
  6. The contract should stipulate no entitlement to sick pay or holiday pay and other benefits that employees have such as sports clubs etc….  Again this illustrates differences between contractor and employee contract terms.
  7. The contract can stipulate that there are no minimum hours the company are required to offer.  This can demonstrate that there is no mutuality of obligation (MOO).

The above 7 points we believe are the most important points to take care of when putting together your contract with the Employer.   If you can get some or all of these points into the contract then the likelihood is that you will almost certainly be outside IR35.   Additionally the points below can further help illustrate that you are a contractor and not an employee.

  1. Have your own company website.
  2. Use your own company business cards not the Employers.
  3. Use your company email address.
  4. Put your company name in the Employer directory.
  5. Have a company office (home address can suffice).
  6. Pay your own expenses and bill the company.
  7. Register for VAT.
  8. If possible maintain multiple clients.
  9. Do not wear the Employer’s uniform or name tags etc….

If you comply with most of the above you will stay outside IR35.  The reason being is that you are demonstrating that ‘Mutuality of Obligation (MOO)’ between contractor and employer is not the same as between employee and employer.  

In HMRC’s Employment Status Manual they state that when determining employment status there must be an irreducible minimum of mutual obligation for there to be a contract of service. That irreducible minimum is:

  1. That the Employer must be obliged to pay a wage or other remuneration, and
  2. That the worker must be obliged to provide his or her own work or skill.

So to some degree there will always be MOO present in a contract between employer and contractor. Even in cases where a self-employed worker is not caught by IR35, their client is obliged to pay them for performing their service.  That is why IR35 cases are still surrounded by ambiguity and this leads to many of HMRC’s rulings being taken to an employment or tax tribunal for review.