What is IR35?
Paying contactors can be more tax efficient than remunerating PAYE employees. Employers benefit from avoiding National Insurance payments, pension contributions, sickness and holiday pay.
Contractors can benefit too. Typically, mainstream contractors own limited liability companies, which they use to invoice clients and remunerate themselves. This is tax efficient for the contractor because salaries can be subsidised by dividend payments which are free of National Insurance and personal tax.
So, let’s us all save money by making contactors of our current employees?
As you might expect, Her Majesty’s Revenue and Customs (HMRC) is quite aware of this particular ruse and the aptly named ‘disguised employee’. These are people who maintain a contract relationship with an organisation, but operate just like any other employee.
If HMRC determines that a contractor is an employee by another name, then you can be sure that both employer and contractor will be asked to pay backdated taxes that would have otherwise accrued. As you might imagine, this can be very costly, rather messy and something that everyone would rather avoid.
The key IR35 points
A contract of supply is drawn up between a supplier and a customer for the delivery of specific services over a specified timeframe. Simple points to observe in these contracts are as follows:
IR35 Scope of work
A deliverable is the subject of a supply agreement and not the individual who delivers it. The scope of work defines which is to be completed and should avoid points of general ownership or responsibility that may be expressed without time limits.
IR35 Right to substitution
With reasonable notice, the supplier must be able to substitute one resource for another during the term of the contract. This substitution cannot be easily challenged and ensures that the focus remains on the scope of work and not on the individual contractor.
IR35 Notice period
A notice period can be indicative of an employer / employee relationship, as would be typical in contracts of employment. A supply contract is not an employment contract, so notice periods do not comfortably suit this type of arrangement. However, in most cases, a supplier notice period of no less than one month is deemed acceptable by the HMRC.
IR35 Business-like trading
Beyond reviewing the Agreement, the HMRC may look for legitimacy in other ways. Running a business can’t be an invisible practice. If the business is trading, it has an obvious footprint and so it should be easy for contractors to evidence that their companies are genuine trading entities. They should have the usual trappings of any business such as the insurances, VAT registration, business cards, website and other marketing elements.
Peace of mind when you choose Xperian for contract staff
You can have confidence that both you and your contractor will remain IR35 compliant when dealing with Xperian Recruitment. We issue mirror contacts to both the supplier and our client and those contracts only come into force at the time that both parties have signed them.
Our contracts have been successfully reviewed for IR35 compliance by contract and employer legal representatives.