Managing self-employment and complying with the IR35 rules and regulations can be quite challenging even for the most experienced HR people. Keeping on top on all areas of the Law and compliance needs constant review as these areas are always changing.

What is IR35?

IR35 is a piece of tax legislation that was announced in 1999, which took effect from April 2000. The legislation means that the HM Revenue & Customs (HMRC) can tax some contractors as though they are employees of their clients. Any contractors caught by breaching IR35 will pay significantly more tax thus reducing their take home pay by up to 25%.

Any contractor who does not meet the IR35 guidelines set by HMRC is likely to fall under disguise of self-employment and classed as employees. If the contractor is found to be in breach the end result will mean an increased tax and N.I. liability and this will prevent the contractor companies from retaining profits to grow their business.

Types of Contract Workers?

When a business hires a contract worker they could do it via a payroll (Pay As You Earn) also known as PAYE or, via self-employment. The business could:

  1. Directly hire that worker and deduct their tax and NI and agree a contract for ex period or,
  2. Obtain the worker from an Agency or Umbrella business who are employed by them under their PAYE or,
  3. Hires the contract worker as self-employed and the worker agree to declare their own taxes unless the work falls under the Construction Industry Scheme, which is also known as CIS.

Why would a business directly hire a self-employed worker?

Many UK businesses hire contract workers either on a:

  1. ad-hoc basis for general cover
  2. contract for a specific job
  3. temporary assignment because the job cannot justify employing someone permanent.

Questions to ask if the worker is genuinely self-employed?

If the business opted to hire self-employed workers then those businesses must ensure these workers are genuinely self-employed. Key questions to ask yourself is, before hiring a self-employed worker:

  1. Are the workers qualified to do the job?
  2. Do the workers have the final say in how they run their business?
  3. Do the workers risk their own money in their business?
  4. Are the workers responsible for meeting their losses as well as taking their profits?
  5. Do the workers provide the main items of equipment to do their job?
  6. Do the workers provide their own right of substitute if they cannot do the job that they are contracted to do?
  7. Do the workers' pay the right of substitute workers out of their own pocket?
  8. Will the workers correct unsatisfactory work in their own time and at their own expense?
  9. Are the workers registered with HMRC and are permitted to work as self-employed?
  10. Do the workers need any licenses or accreditations to do the work that they are contracted to do?

Subcontracting a self-employed worker

When a worker is issued a contract has the following areas been included in the agreement:

  1. Purpose of the contract
  2. Place of work
  3. Obligation for work
  4. Availability for work
  5. Direction and Control
  6. Payments and business leads
  7. Health and Safety
  8. Tax and N.I arrangements
  9. Equal Opportunities
  10. Health and Safety
  11. Standards of Performance and Conduct
  12. Termination

If any worker contract does not cover the above areas then the contract could be deemed as being non-compliant. HMRC will then look at the contracts that you have agreed with your clients and if these contracts do not cover what is agreed in the Contract for Services agreement for your workers, then you are likely to be challenged under IR35.

If you are not sure if your business is IR35 compliant, did you know you can take a free comprehensive IR35 test once you registered with the ComTracker. This test is free and will advise you if your business is likely to fail an IR35 inspection. Sign up for my free IR35 test.

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