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Do your working practices reflect a genuine outside IR35 assignment?
With IR35 reforms just around the corner (coming into effect 6 April 2020), companies across the private sector are reviewing how they engage and work with contractors.
Of course, the first step in preparing for the reforms is making your determinations- i.e. assessing whether a particular contract assignment falls inside or outside of the off-payroll worker rules. As you may well have experienced already, assessing IR35 status isn’t always easy as there are a number of influencing factors.
With the time pressure mounting, many businesses are, understandably, focusing on the act of undertaking their assessments and ensuring a compliant approach is in place for assignments deemed as ‘inside’. But something else which requires some thought is the genuine ‘outside’ assignments and the working practices which go alongside them.
If you’re considering reviewing or changing your existing practices to ensure they are consistent with an outside IR35 determination, you may wish to consider the following changes to your working practices with contractors:
1) Personal Service – the worker is required to provide their own work or skill in performing the work
You may wish to consider providing workers with the right to send a substitute, although this must be genuine and the worker must engage and pay the substitute (rather than you engaging/paying them directly). In order for the right of substitution to be genuine, you should ensure that you only have the right to reject the substitute in circumstances where they are not suitably qualified or skilled to carry out the work and you should keep any checks on the substitute to the absolute minimum required.
You may wish to consider implementing a substitution process for contractors within your business and providing training to those of your staff who manage contractors, to ensure that managers and contractors are aware of the process and are using it in practice. You should also check that your contract with the worker contains the right to provide a substitute.
2) Mutuality of Obligation – the client is obliged to offer the contractor work and the worker is obliged to perform it for pay
HMRC’s interpretation of this factor is that Mutuality of Obligation will be present in all cases where work is done in return for payment. There is some debate as to whether this is the correct interpretation of the law and this has been challenged in recent case law.
You may wish to consider the following working practices within your business:
- Ensure that workers are only asked to carry out work within the scope of their contract (and issuing a new or amended contract where the scope of work changes)
- Check that there is no minimum level of work set out in the worker’s contract
- Where there is a break in a project or no work is required from the worker on a particular day, inform the contractor and do not pay them where no work has been carried out
- Ensure that the worker remedies any defects in their work at their own cost and without receiving additional payment (and that the worker’s contract allows you to enforce this)
- Check that the worker’s contract allows both parties to terminate with minimal or no notice
3) Control – the client has the right to decide how, when and where the work will be done
You may wish to review your management practices in relation to contractors and consider whether your business can manage them in a more ‘hands-off’ way. In particular:
- Consider whether they need to work at your site, or whether some or all of the work could be done at another location (of the worker’s choosing)
- Consider whether the work needs to follow a set working pattern, or whether you can provide the worker with control over their working times or hours
- Try to avoid closely managing workers on a day-to-day basis and do not conduct performance reviews (or other HR processes) on contractors
- Consider whether the work can be broken down into deliverables/milestones and the contractor given some freedom as to how to complete the tasks
- Only apply HR/staff policies which are necessary for the safe completion of the work (e.g. Health and Safety, Premises Security, IT Security)
4) Integration – the worker is integrated into the client’s business operation
Generally, you may wish to take steps to ensure that contractors are easily distinguishable from your own staff and do not receive staff benefits unless required by law. For example:
- Provide contractors with different lanyards or security passes, which identify them as contractors
- Do not include contractors on the same organisational charts as your staff
- Ensure that contractors’ email addresses and signatures identify them as contractors
- Do not provide them with non-statutory staff benefits – e.g. access to subsidised facilities or social events
- Ensure that contractors do not hold themselves out as a representative of your company to 3rd parties (or, where this is a requirement, make sure it is clear that they are a contractor)
- Make sure contractors do not have line management duties in relation to your staff
5) Business on own account/ business dependency
Where possible, you should take steps to help ensure that the contractor is not solely dependent on your business for its income and that it accepts business and financial risk in respect of the work. For example:
- Ensure that the contractor’s contract allows it to take on work with other clients and does not place any restrictions unless absolutely necessary
- Check that the contractor is required to hold business insurance
- Make sure that the contractor is responsible for the delivery and quality of the work and that any defects are remedied at no additional cost
- Consider whether the work can be broken down into deliverables/milestones and the contractor paid on completion, rather than on a daily/hourly rate
Contingent worker policy & training
Once you have reviewed your working practices and decided to make any changes to how contractors are managed, you may wish to prepare a policy, or policies, setting out how contractors should be managed and ensure that your contractor management procedures and practices reflect these changes.
It may also be important to train your those of your staff who have responsibility for managing contractors to ensure that the changes are implemented consistently across your business and to help you demonstrate to HMRC that your practices reflect your policies/procedures should you receive an IR35 compliance audit.
Please note: Gattaca plc and its affiliates do not provide legal, tax or insurance advice or services. This material has been prepared for informational purposes only and is not intended to provide and should not be relied upon for legal, tax or insurance advice. You should consult your own legal, tax and insurance advisors before engaging in any transaction.
For more information about IR35 and the compliant workforce solutions we offer, head over to our IR35 hub.