IR35, Recruitment

IR35 is easily avoided, but it’s time to get with the programme

I’ve read a lot of articles lately talking in doomworthy terms about the Off-Payroll working rules from April 2020 that will apply to the private-sector for contractors. Similar rules have been in force for the public-sector since 2017, with many widely predicting that private-sector IT firms will be either curtailing the use of contractors or forcing them to become permanent employees.

If you somehow haven’t already read an article explaining what all this means, in short the burden of IR35 status determination shifts from the contractor’s business to the end client or ‘fee-payer’ from April 2020. This is designed to catch ‘shadow-employees’ – those who earn money without Tax and National Insurance Contributions deducted – by threatening the fee-payers directly with fines and a large retrospective tax bill if they’re discovered to be using contractors that fall within IR35 – or in other words if they’re considered basically employees where their use of a limited company is just a means to pay less tax on employment earnings.

The taxman really hates this, and there are certainly situations where this is exactly what’s happening. The simple logic goes that if you were to remove all the indirection that a limited company ‘intermediary’ (or Personal Service Company (PSC) as HMRC like to call it) provides, and still have the same working relationship with the client, would you essentially just be working like an employee? If the answer is yes, then logically you should be taxed like one.

Just an attention-grabbing article headline?

The reason I say IR35 is easily avoided is because…well, it is. A significant majority of contractor engagements legitimately fall outside of IR35, but risk being considered inside because of a fundamental lack of understanding of the rules by clients, agencies, and contractors alike. Agencies often recruit for permanent employees and contractors both, and have somewhat sleep-walked into a tendency to use the same processes for contractor engagement as they do for ‘permies’. They use the same recruitment terminology, and the engagement follows the same routine of sending a CV and having an ‘interview’ with the client. This is not how a B2B relationship works.

Meanwhile clients are usually just looking for talent to fulfil a need, and might first look for a permanent employee but resort to backfilling with a contractor due to specialist demand and contention in the IT market. Their unfortunate mentality is that a contractor is essentially an employee but just paid differently.

And sadly, contractors themselves who aren’t terribly savvy let themselves be carried along in the processes set forth by clients and agencies alike who have got the wrong end of the stick as to how working arrangements and engagement terms should work. They send you a bunch of forms to fill out, and give you a contract, and because you want the work you fill it all out and assume this is how it’s supposed to be.

The combination of these poor-diligence factors from all parties is a situation where if HMRC come knocking and want to know about a particular engagement, you’re going to have a heck of a time trying to pretend this is a legitimate business-to-business relationship and not just an employee by any other name.

The Good News

All of this is easy to overcome. Inevitably, it just requires a bit of education and a realignment of the way you engage a business to service the requirement of another business. These are my top tips whether you’re a client looking for talent directly, or an agency seeking a contractor:

  • Don’t ask me for my CV. A CV is for an individual, and I’m a business. Ask for my business’ experience profile, and I’ll send you all of the skills my company is able to provide along with an overview of its previous clients and achievements. It’ll contain all of the information you’re looking for.
  • Don’t send me a job description. A JD is for an employee. What your client should have is a project-based scoped requirement for the delivery of work. If this is compressed into a job title, e.g. ‘IT Engineer’, you’re doing it wrong. What does the client actually want achieved within the timeframe they have in mind? Sorry, you’ll need to have a think and fully specify it.
  • Don’t tell me you want to put ‘me’ forward for an ‘interview’. Employees have interviews – I’m just the person representing the business. I’ll have an exploratory discussion with the client to determine whether we think there’s a feasible working relationship our businesses can have. If we both agree, great!
  • Remember that because you’re engaging my business, it won’t necessarily be the same person doing all of the work all of the time. At any time the person my business provides might be substituted out for someone else of equal skill who is able to do the work instead. We’ve written that into the contract, so don’t be surprised if it happens.
  • I don’t want to know about how cool or fun your office workplace is, or how the people who work there go for pizza and beers on a Friday afternoon. That’s great for your employees, but I’m running my own business here and I don’t need to know about that. Similarly I don’t want a company-branded nametag, or t-shirt, or any of the loot that you give your employees. I don’t want to partake of any of your employee benefits. Thanks for the offer though.
  • Don’t tell me who my line manager will be. I don’t have a line manager. I work for my own company. I might, on the other hand, have a senior point of contact in the client’s business. That’s fine with me, I need to know who to speak to after all, but let’s not get confused that I’m under someone’s direction and control. I’m not.
  • Don’t tell me there are opportunities to work from home. Work from home? I’m a business, I’ll be working from my own office (which might happen to be in my home) unless there are reasons to be present on the client site. There might be security constraints that require physical presence, meetings, scheduled updates, etc. But generally speaking you don’t get to control where my employee works. Don’t give ‘me’ my own desk – it’s not my desk, it’s your desk. My business is interested in a productive working relationship, so we’ll discuss the best solution as part of our initial discussion.
  • I don’t really want to use your equipment. I’ve got my own equipment that my business has bought and paid for. So unless there is an impossible constraint that requires me to use your laptop (usually security, restrictions on encryption, migration of data off-site, etc.), I’ll be using my company’s gear. Thanks though!
  • Don’t send my business a contract that aligns with IR35 insofar as the wording of the contract goes if you’re not absolutely certain that it properly reflects what the working-relationship with the client will be. An actual IR35 investigation will be far more interested in those critical working practices as described above than whether the contract sounds correct.
  • After this project (that the client has carefully specified) concludes, we both understand that the client not obligated to provide any new work to my business, nor is my business obligated to undertake it. If the client has got a new project they’d like my business to work on, we’ll put together a separate contract with those specifications embedded as before.

If all of this sounds really unreasonable, or precious on the part of the contracting business, I can only apologise but also reiterate that this is precisely how it’s supposed to be. Anything less than the above and you risk falling foul of IR35 Off-Payroll rules that would rightfully identify you as effectively an employee, or a ‘permitractor’ as we like to say in the industry. You’re part of the problem. Fee-paying clients have full discretion on how they arrange their internal project-based work requirements, and it should be pretty straightforward, and not the enormous burden that everyone is making it out to be, to properly package work into engagements that legitimate contractor businesses can consume. The taxman is relying on businesses ultimately being too fearful or just plain feeble to address these issues confidently.

Some of this will require some tweaking in your expectations, your processes, your use of terminology and more importantly your mentality. IR35 is designed to target people using limited company intermediaries as a thin shell for tax avoidance. Ultimately it’s pretty trivial to properly align your terms of engagement to guarantee that your search for a contractor is correctly and legitimately outside of IR35, and way beyond April 2020 private-sector business can continue to legitimately engage contractors as much as they wish, provided they are mindful and take note of the points above.

It might be possible (but you’d really need to convince me) that your business just cannot comply with the above for one reason or another. At which point you concede and advertise the ‘role’ as inside IR35 and search for contractors on that basis. You pay their Tax and NI and increase your costs. I’d expect them to be harder to find mind you, as their business is probably off working for a client that doesn’t have your problem – although I’ll agree that this is somewhat dependent on industry.

Contractors are businesses, treat them like one. It’s time to get with the programme.