What is a contractor?

In 2018 there were approximately 2 million self-employed professionals working in the UK. Out of which, approximately 1.77 million working as full-time contractors and about 234,000 working on a self-employed basis as their second job. Between 2008 and 2016 the number of self-employed professionals in the UK has increased by 43% approximately. In total 15.1% of the workforce are classed as self employed.

It has been predicted that by 2020, 50% of the workforce will be self-employed and contributing more than £51 billion to the UK economy. The workforce is shifting and the model of full-time employment is becoming obsolete. It is almost impossible for businesses to ignore this evolution.

What is IR35?

IR35 is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name. If a contractor is operating through an intermediary, such as a limited company, and but for that intermediary they would be an employee of their client, IR35 kicks in.

What are the main ways to test to see if a contractor is inside IR35?

Control, substitution and mutuality of obligation.

  • Control: what degree of control does the client have over what, how, when and where the worker completes the work?
  • Substitution: is personal service by the worker required, or can the worker send a substitute in their place?
  • Mutuality of obligation: mutuality of obligation is a concept where the employer is obliged to offer work, and the worker is obligated to accept it.

Other factors are then taken into account to determine whether you are caught by IR35 include the contract type, whether you are taking a financial risk, if you are ‘part and parcel’ of the engager’s organisation, being in business on your own account and provision of equipment.

All of this evidence is taken into account, and if the balance of probabilities is that the worker is an employee then IR35 applies. So, for example, if a worker genuinely has an unfettered right to send a substitute in their place, personal service is not required and IR35 cannot possibly apply. But, relying on that alone can be fraught with danger.

So why will this slow down IT in the UK?

There are a lot of contractors working on critical projects in the UK.

With IR35 looming over contractors, they have a lot to be concerned about :

  • The technical task they are undertaking. (The actual job).
  • How to act as a company staying outside of IR35 instead of an employee while not alienating the customer.
  • Possibility of an investigation by HMRC.

With this worry hanging over all Ltd company contractors and the added time and cost of employment status interviews by companies, efficiency is already suffering as a result.

Understanding how to employ an outside IR35 contractor?

To employ an outside IR35 contractor a company has to realise that they are effectively outsourcing work to another company.

  • The contractor has control over the work that is being done, how it is done and when it is done.
  • The contractor has the right to send in a substitute to carry out his / her task.
  • The contractor is not mutually obligated to carry out the work if he / she deems it is not part of the contract and the company is not obliged to offer continued contractual work.

Too many companies employ a contractor to fill a normal employee role that they are struggling to fill. This is beginning to change. Contractor roles are slowly moving towards task-based roles rather than, 3 months of contract work doing whatever the client requires at company A.

Companies are rapidly assessing their contract workforce who are affected by IR35:

  • Putting in PSC blanket bans for contractors.
  • Offering individual assessments based on CEST tool which has been proven to be totally inaccurate and flawed.
  • Offering contract reviews with large external firms.
  • An ongoing understanding about how to employ outside of IR35 contractors, how to outsource via outside IR35 and using the correct language to allow contractors to operate within an organisation without fear of investigation.

How is IR35 affecting me?

I had a contract review at my current company last week. We ran through the CEST tool and we got to the question about substitution and we mistakenly selected that my current customer has the right to reject a substitute.

  • To operate outside IR35 a company must accept a substitute.
  • My contract is now being sent over to an external company to be evaluated for IR35 status.
  • If I am deemed to be inside IR35 I will have to raise my contract daily rate by 29% to earn the same amount as I am currently.

Why a contractor can be good value for a company?

When a permanent employee is taken on there are a lifetime costs to be considered, not simply the salary:

  • Recruitment agent fee
  • Gross salary
  • Employees national insurance
  • Office space
  • Expenses
  • Subsidies (coffee, meals, social events)
  • Sick pay
  • Holiday pay
  • Maternity pay
  • Pension contributions
  • Administration
  • Training
  • Notice period
  • Possible redundancy pay
  • Lack of experience

The costs of employing a contractor, even if a contractor is paid two or three times the permanent staff salary, may still be good value for the company. The contractor benefits by being in control of his or her own costs – at the risk of losing a position without notice – and the company benefits by having a well-defined price, no long-term costs to consider, and being able to hire and fire at will.

When a company is forced to pay for all of the above it can be expensive so employing a contractor may save a company money, depending upon the task, the length of time the contractor is needed and the experience required.

So why does IR35 matter to permanent staff?

IR35 seeks to bring outside IR35 contractors who manage their own finances into umbrella organisations who pass on the cost of managing the finances onto the contractor and reduce the daily rate of the contractor to cover these costs.

Usually when working through an umbrella company, the hiring company pays the contractor through this umbrella company who take a cut so the contractor loses a chunk of his/her daily rate to the umbrella company, there is extra cost of administration, PAYE taxation and national insurance all passed on to the contractor. With these extra costs it makes being a contractor pretty much pointless as the contractor will receive none of the benefits of running a company with all of the hassle of operating a company.

If a contractor is now as cheap as a permanent member of staff and they don’t have any of the rights or costs associated with a permanent member of staff because they operate through an umbrella company, wouldn’t it make sense to fill companies with these cheap expendable contractors?

Will we see permanent members of staff being forced out of companies, in favour of cheap inside IR35 contractors, whose contracts can be ended easily when projects end?

A truly mobile workforce based upon project requirements with low costs and very few employment rights.

Source : IPSE