We've put together a series of IR35 videos with our partners at QDOS to help answer the more common IR35 questions we get asked.
Check out the video at the bottom for an in-depth answer or if easier give the team a call on 0203 3974565 and find out more on what are the key factors to consider when determining if a contractor is inside or out of IR35?
Key Status Tests
The contract is an important factor when it comes to determining status but the working practices will largely be what carries the weight when it comes to making a determination of the contractor status or the status of a collection of contractors. When HMRC or companies look at status what you need to consider are the key status tests.
You have the substitution, which everyone will have heard a lot about, mutuality of obligation and control. Those are the 3 minimums when it comes to status and those key status tests are derived from employment law case history.
It’s case law that has existed for a really long time and it’s important for organisations to remember that the factors that determine IR35 status today and from the 6th of April are the same as those that have existed for a long time.
The greatest amount of weight has been attributed to the key status tests but organisations also need to look at the wider picture too.
Organisations need to look at all matters of status, including:
How integrated the individuals are within your organisation. Are they easily identifiable as contractors?
What financial risk do those individuals have?
Do they have exclusivity restrictions on their contracts?
From an equipment perspective how does that work within the organisation?
All these smaller tertiary things, whilst they will never win an argument in isolation, can still help to support the IR35 position or work against the IR35 decision.
HMRC will look at the key status tests in the event of an investigation and then look at how the contractor actually operates within the client organisation. So though contracts are a consideration the reality of the engagement is what the determination is really based on.
Even if there are compliant contracts one really needs to be thinking about the education throughout the whole business of how a contractor should be treated. It can be hard for some stakeholders to adjust to that change because they’ve been working a different way for a really long time.
In terms of timescales, organisations need to already be thinking about education within the business around this and implementing changes now.
Some organisations are struggling with the substitution clause and the idea that by allowing it all of a sudden there will be an influx of contractors being brought in and making substitutions everywhere. The reality is that won’t be the case for a lot of reasons:
Contractors tend to engage with clients and get invested in their projects. They want to be the person delivering the service and would only ever bring someone else into the mix if they genuinely had a requirement to do so.
There is also a commercial consideration for contractors so if a contractor introduces a substitute they are forgoing thier fees and respect in the period where they aren’t providing the service.
A lot of clients as well seem to have concern around the fact that substitution has to have been demonstrated in order to substantiate the test effectively and again that isn’t the case.
The test is about having the right to substitute should a contractor have a requirement to do so. As long as the client will allow for that then that is satisfactory for that test.
If there are examples of substitution within an organisation taking place then great but it doesn’t have to be the case.
There are a lot of myths and unnecessary concerns that some organisations have from an education perspective.
There may genuinely be some scenarios where it’s also not appropriate for the client to have a substitution on a particular project or engagement and that is fine but what clients should appreciate is the impact that can potentially have on the status determination and what their view is.
There is an opportunity to redraw the lines and set utilisation of contractors up from here in a more IR35 compliant way rather than following old habitual methods.
Length of service
Length of service doesn’t automatically have an impact on a status determination and doesn’t automatically mean the contractor will be considered inside IR35. It is a feature and does need to be considered because as soon as you have contractors and organisations for lengthier periods there are risks of integration and being moved from job to job. You would be failing mutuality of obligation and control at that point.
However after the contractor has been presented with a new opportunity for a new project on a 6 or 12 monthly basis or if its every 2 years, whatever the basis of the contract is, and the client has the necessary paper trail to support that plus the contractor had the opportunity to decline or accept there’s a useful piece of evidence from an auditing perspective.
Any evidence like this or where a contract was terminated at short notice or examples of contractors having declined work are all really useful for audit.
From a policy and process perspective, this is where engagements with agencies such as Consortia are really useful. They can be helpful as they have the processes and procedures in place for presenting new opportunities to contractors via paper trails and documents and contract extensions. And these are all things you need to start to think about.
Years ago HMRC would have looked at service and would have had that as their area of focus. They don’t tend to do that much now. It is a factor but the key status tests are what drive the determination
Working Practices and Treatment of Contractors
Where organisations have had bad habits they may now need to reconsider their working practices. It is the time now to make sure the proper processes and policies are in place for contractor working practices.
In 2020 and 2021 it has been understandable that contractors have potentially had access to company devizes for a number or reasons during remote working around the pandemic. HRMC wouldn’t necessarily take a strict view on this at this time but there are basic smaller things that companies can do to show HRMC and help make a case that their contractirs are not integrated into the orgnisations fabric.
Small points such as email signatures stating that the contractor is an external contractor and are not part of that specific business. Similarly .ext on the end of email addresses can show emails are from an external source.
Contractors not being included on all staff email groups and not having access to certain network and intranet areas. Instead only having access to the core essential software packages etc that are needed to complete their job. Contractors also don’t need access to holiday request HR platforms or expenses systems.
All these small working practices help draw the line of how a contractor works within the organisation vs internal staff.
Any due diligence clients can do now, in advance, to assess their current position and make any changes needed is great. Contractor handbooks and policies and procedures to show how external contractors should be seen and are really useful and can be used by hiring managers, ops managers to see how contractors are ultilised within the business. Also, these should be shared with the contractors themselves so they can get a full appreciation of how they should be operating within the business.
Interestingly many companies that got part of the way through their reviewed working practices last year may have experienced some surprise from contractors when they shared those policies and new practices compared to what they thought the working practices would be. That surprise largely came from the fact up to this point information was never properly shared or discussed between contractor and client before as it is now. Now, these need to be widely shared and understood by everyone ahead of April 6th.