As you may have noticed if you are regular reader of Ask Andy, all of the questions so far have come from other contractors. However, it is the end clients who will have extra work (and liability if they are also the fee payer) to pick up. So, when our Head of Tax, Andy Vessey, received a question from an end client about how they engage with the forthcoming IR35 reforms, he jumped at the chance to answer it and put his twenty-plus years working with the legislation to use.
We are an engineering consultancy, however we also run contractors. This can be time and materials at the customer, or on one of our own projects. We have a couple of questions around IR35:
1. Right of substitution: It would appear this is key and if we use the CEST tool, say no responsibility for customer staff, with right to substitute then our contractor is outside IR35. Is it that simple and what is the actual definition of right to substitute, can they interview, etc.?
2. Secondly, a customer of ours has made a blanket statement of everyone inside IR35. How can I then make my contractors outside? If we are delivering work packages or managed services, does that just make them inside for me instead?
Where a worker has a wholly unqualified right to provide a substitute, this will be a strong indicator of self-employment and may even be determinative by itself. By this, I mean that the worker could send a substitute of their choice at any time to carry out the work provided they remain responsible for paying the replacement worker. An end client can have a right to veto the chosen substitute and this will not dilute the right of substitution provided that right of veto only extends to ensuring that the substitute possesses the necessary skills, qualifications and experience to carry out the work. An end client who can reject a substitute for any reason whatsoever will diminish the right of substitution and lessen its influence on the employment status of the worker.
With regard your second question, if you are providing a genuine contracted-out service to your customer – for example, your company is delivering a specific project or piece of work that it manages and has full control over – then your customer is not responsible for determining the employment status of the contractors you engage but rather the contractors themselves are, unless your consultancy is a medium-large sized company, in which case the responsibility is your own.
If, however, your customer is in fact responsible for making status determinations then they should not be making blanket assessments unless all workers are engaged under the same contractual T&Cs and, in practice, work identically. Otherwise, the end client is not exercising reasonable care.
A contractor would be outside of IR35 if:
– their end client has an insufficient degree of control over the manner in which the work is carried out;
– their personal service is not a feature of the contract, i.e., they have a genuine right of substitution and/or can sub-contract a significant part of the work to third parties, and/or can engage assistants to help them with integral aspects of the work; and
– there is an absence of mutual obligations between the parties, i.e., a worker can refuse work offered without penalty and there is no expectation by the worker that the end client will offer them work and that if such work is offered, the contractor will accept such work.
Although there are other tests of employment these three carry the most weight. It is important however that any changes to a contractor’s contractual and working arrangements must be genuine and not simply window dressing as HMRC will see through any sham arrangements.
How to Ask Andy
Andy has been working with IR35 legislation since its inception back in 2000. If you have a question about April’s reforms – whether as a contractor or client – then Andy is the person to ask. Simply complete our online form and Andy will do his best to answer right here on the Kingsbridge blog.
One of the most daunting aspects of the reforms for end clients is having to produce a Status Determination Statement (SDS) for your contractors as there is a very real fear of getting it wrong and having to deal with HMRC further down the line. As a more comprehensive alternative to CEST, we recommend you try the Kingsbridge IR35 Status Tool. Developed by Andy, this unique hybrid tool asks you to answer a series of yes/no questions around contract wording and working practices before issuing an inside/outside IR35 determination along with a full report which you can pass on to your end-client or fee payer. If your case is borderline, it’s handed over to an in-house IR35 specialist who will manually review before issuing the result.
