Don’t be liable for someone else’s tax bill – be prepared for April 2020

From 6 April 2020 all public authorities and medium and large-sized Companies will be responsible for deciding the employment status of workers.

Previously where the individual was engaged via an intermediary, in most cases the contractor’s limited company (often called a personal service company) the responsibility for deciding if they were an employee would rest with the individual. This responsibility now shifts to the engager.

What you need to do? 

You will be responsible for determining the employment status of your workers.

You’ll need to:

  • decide the employment status of each worker – you must do this for every contract you have with an agency or worker
  • pass your determination and the reasons for the determination to the worker and the person or organisation you contract with
  • make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid under the contract
  • have processes in place to deal with any disputes that arise from your determination
  • you will also need to review your onboarding processes to ensure that employment status is checked for each new engagement

This change will only apply to if there is a large or medium entity within the supply chain, the responsibility for determining whether IR35 applies remains with the worker’s intermediary and not the engager.

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IR35 checklist: how do I determine the employment status of these workers?

In general, IR35 won’t apply if the contract is for services rather than employment. To understand the difference, you should see whether the contract specifically mentions these principles:

1 – Supervision, direction, control

This relates to how much say you have over how they complete the work. For example, if they have to work at certain times at your premises this implies employment

2 – Substitution

Could they bring someone else in to complete the contract, or do they need to do the work themselves? If they can’t send someone else, they are likely to be within IR35

3 – Mutuality of obligation (MOO)

Is there an obligation to offer work, and do they have to accept it? This is called mutuality of obligation, and if it exists, the contract will fall within IR35

1 – Supervision, direction, control

For a contract to fall outside of IR35, contractors should have freedom over how they complete their work. A contract that specifies things like the time they can start and finish work, or the days they are required to work, is one that points towards employment.

Other elements of an employment contract that HMRC look out for include the company overseeing the contractors work excessively, and giving guidance on how to complete it.

Plus, if they are not only providing their services for the agreed job but also work on different tasks as you see fit, the contract is likely to be within IR35.

2 – Substitution

Do you only want this person to complete the work? For a contract to fall outside of IR35, they should be able to send a substitute to complete the work instead.

This means the contract should state that someone else can provide their services to complete the work. The clause has to be genuine –the contract can’t be so restrictive that they essentially need to do the work themselves.

3 – Mutuality of obligation

This is an important clause to include in a contract, as it’s a key test when determining self-employed status.

If the company is obliged to offer work (and pay them) and they are obliged to take it, this demonstrates a contract of employment. In practice, a self-employed contract means working on a project-by-project basis. Once they have completed a project, they are under no obligation to work on further tasks (and the company is under no obligation to offer them further work).

You should also consider whether they can work for other clients simultaneously. If the company and contract prohibits that, it points towards them being an employee rather than self-employed.

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Other factors on your IR35 checklist

There’s more criteria to consider when determining your IR35 status:

  • Equipment – who provides the necessary equipment to carry out the work.
  • Financial risk – self-employed contractors usually take a degree of financial risk, like any business would. 
  • The way they are paid – self-employed people commonly are paid on a project basis, which might mean when the work is completed or at particular project milestones
  • ‘Part and parcel’ of the organisation – if contractors become so ingrained that they become part of a company’s structure, with people reporting to them for example, this points to employment rather than self-employment
  • Intentions of the parties – the contract should make sure the relationship between contractor and the company is one of supplier and customer
  • Business ‘on their own account’ – essentially this determines whether they actually running their business as a business

It is essential that the contract mirrors the actual situation and that there is clear definition between those treated as employees and those treated as self-employed.

Commonly, there will be indicators of both employment and self-employment in many engagements and it can be difficult to reach a definitive conclusion.

It is important the review of contracts commences as soon as possible to ensure that the employment status determinations have been made for all engagements. Menzies Employment Solutions Team would be happy to assist with reviewing your current contracts and practices and implementation of new procedures and controls to ensure your organisation is fully compliant for the new change on 6 April 2020 or to reduce risk in the event of a HMRC Employment Status enquiry.

Posted in Blog, Recruitment, Financial Services