IR 35 has for a long time been an apparent morass of conflicting opinions and advice (all with the best of intentions) which, if misinterpreted, can misfire badly. This is particularly so now, as new legislation can make the hiring entity potentially responsible for the tax due from the contractors used.
As in all such cases, the legal path has been well trodden. Answers may not be a mystery, but they often, via litigation, take a long time to reach, at great expense in the Courts. The defining concept of ‘Employment’ as opposed to contractor status has long been established as ‘Mutuality of Obligation’, a concept dear to the heart of all Employment lawyers. However, this can often be obscured in the rush to appoint an individual to an urgently needed position when other conflicting needs compete.
As we all realise in life, taxes must/will be paid, the only question is when and by whom. Potentially risk arises when a contractor/Personal Service Company is paid gross by the hirer, without the benefit of application of Employer’s NIC or PAYE. If there is any doubt as to the validity of the status of the individual in question, then it is this point which can initiate interest from HMRC and, potentially, an investigation which will undoubtedly be more expensive, especially in terms of management time, than any tax potentially owed. It is, therefore, in all circumstances, to obtain professional advice on the status of such individuals. A ten minute ‘phone call with your solicitor at this stage can prevent the loss of substantial sums at a later date. This can hardly be stressed enough.
However, there are simple steps which can be taken to clarify whether such an individual is likely to be viewed as a contractor and hence able to legitimately avail themselves of the benefits of IR 35 treatment.
The following points must be satisfied:
– Do you have the capability for the task in-house? If not,
– Is there a need for a specific (other) individual to complete a specific task and:
– Is that task defined and discrete, as opposed to an ongoing, continuous need? If so
– Will the individual engaged be personally responsible for the completion of the task and will they have autonomy and authority with regard to the task?
If, in addition, the engaged individual is confined solely to the defined task in question, and can proceed without any direction/permission from line management, then s/he is likely to fulfil the requirements for a genuine contractor.
However, as stated above, advice on this point is crucial, and the best way to obviate difficulties before they arise and hence reduce costs and diversion of resources which is, in essence, the ail of all proactive legal advice.
Once this point has been reached, it is equally as important to enshrine all of this in an appropriate contract. Berlaad Graham can help with this as a matter of course. It is strongly advised that firms do not rely on generic documents or – Heaven forfend- those easily obtainable from the Internet. These will almost always cover some or most points. But in law the Devil really is in the detail and bespoke agreement is by far and away the most cost- effective way of ensuring not only successful completion of the project in mind, but also peace of mind – a commodity almost beyond price!
Aidan Loy is our legal expert in Employment & HR law.