Engaging Contractors, IR35 and Employment Status
The law has not kept up with the terminology and the multiple ways of engaging staff meaning that it can be difficult to assess their employment status for both tax and/or for employment rights. There are now freelancers, zero hours contract workers, zero hours contract employees, sole traders, contractors, consultants, limited company contractors, secondees, interns, volunteers, casual workers and bank workers, amongst others. Many of these terms do not have legal definitions.
In terms of employment rights, a business will need to be able to assess whether a person they engage is an employee, a worker or self-employed. In terms of tax obligations, the business will need to assess only whether the person is an employee or is self-employed.
These are questions that many businesses get wrong, despite best intentions. We have expertise in this very technical area of law and can assist you with assessing your aims and the most appropriate manner in which to engage staff in the particular circumstances, drafting appropriate contracts of employment, contracts of engagement, Master Services Agreements with Statement of Works which reflect the nature of the labour and/or services supply in question.
IR35 and Off-Payroll Working
Our expertise extends to what is colloquially known as IR35 and more commonly now as the “off-payroll working rules”. The IR35 rules have been in place for many years. IR35 is the reference of the Inland Revenue press release in 2000 announcing legislation to tackle perceived tax avoidance where individuals would supply their services to end-user clients through their own intermediary, such as their own limited company (often referred to as their PSC – personal services company), paying themselves in dividends rather than PAYE income tax. “IR35” provided that where the individual would have been regarded as employed, if the relationship were directly between the individual worker and the end-user client. The onus in the “old IR35” rules was on the PSC to determine the employment status and whether the individual worker should be treated as an “employed earner” for NICs and employed for PAYE income tax purposes (known as “inside IR35”) or not (“outside IR35”), following tests relating to personal service, mutuality and control.
The “off-payroll working rules” applicable from April 2021 in Chapter 10 of ITEPA 2003 moved the onus on assessing the employment status of anyone engaged through a PSC to the end-user client (unless the end-user client is within the “small company” exemption – when the old IR35 rules in Chapter 8 of ITEPA 2003 will still apply). The end-user client must also pass that employment status assessment and the reasons for it, in the form of a “Status Determination Statement” (SDS), down the labour supply chain which can include other employment intermediaries such as recruitment businesses, to the PSC and the individual. The entity who pays the PSC for the worker’s services becomes the ”Fee Payer” and responsible for deducting income tax and NICs where the status determination is that the worker is in “deemed employment”.
We are able to provide support in assessing whether the engagement of a limited company contractor is within the scope of the new off-payroll working rules or whether old IR35 applies, including whether the business is the end-user client of the services (this is not always straightforward and the business may not be the end-user if services are supplied as part of a fully outsourced service rather than the supply of labour). We can assist with employment status determinations and the process of dissemination of the SDS and can advise on compliance with obligations under the off-payroll working rules.
