Small business client hirers who engage a contractor through their personal service company are not impacted by the IR35 regime.
Contractors will be broadly aware that the effect of the off payroll IR35 regime will transfer the responsibility for assessing whether IR35 applies away from the contractor and their personal service company to the client hirer. The client hirer will be obliged to make a status determination statement at the commencement of any assignment to determine whether the proposed assignment is caught by IR35 or not. In the event that IR35 applies, then the client hirer will be obliged to make deductions in respect of income tax and National Insurance contributions.
Many contractors will want to stay outside IR35, particularly highly paid contractors with rare skills, and to continue providing their services through their personal service companies. Other contractors for reasons of maintaining income will want to do likewise and continue in the same vein as they have provided services previously.
Client hirers which do not meet two of the following criteria will be obliged to determine IR35 status for proposed assignments with the contractor and their personal service company, and determine whether there is a need to make employment tax deductions:
At this time no statutory test exists to determine the status of contractors for the purposes of employment tax. The Taylor Review on 'Good Working Practices' has suggested that there be a statutory definition for tax purposes but at present HMRC will look at established criteria arising from case law and their own Guidance and Employment Status manuals which sets out a number of criteria for determining status for employment tax.
Contractors will therefore need to ask themselves whether they are really employees of their own personal service companies or the client hirer.
When addressing this issue contractors will need to consider what financial risks they are undertaking in performing services in respect of the proposed assignment, whether there is any possibility of making a loss, or whether they can work in a way that increases profitability. Other considerations will include whether the contractor has invested any capital into their business. Other factors may include whether the contractor has any influence over the rate of pay for the assignment, and whether expenses are paid. The length of the assignment and whether it is casual, short term or long term may also be relevant. Importantly contractors will also be obliged to complete the check for employment status test otherwise known as CEST, which is a HMRC tool, and be expected to make full disclosure of all relevant circumstances before being able to rely upon a decision.
If contractors want to keep their assignments outside IR35 they should be considering the structure of such assignments when negotiating with the client hirer. Within any commercial contract there should be a statement of intention defining the contractor's responsibilities, deliverables and outcomes. The contracts should make clear that the contractor is not be the subject or control supervision or direction of client hirers. There should be a right on the part of the contractor to substitute where possible. Within the commercial contract there should be a reference to timelines, targets and phases of a particular assignment and linking payment to achieving such targets and milestones. The contractor needs to accept there is a need to be responsible for any losses arising as a result of services provided. Where possible, contractors should provide their own equipment. The assignment should also build in degrees of flexibility where possible and avoid exclusivity and restrictions on providing services to one sole client. It is also important that contractors are not held out as an integral part of the client hirer.