IR35: Don't forget about employment law
Employment status is not just a tax issue.
One of the biggest myths about personal service companies is that the individual providing the services is never owed any employment rights by the client receiving the services, or by any of the intermediaries.
Legislation such as the Agency Worker Regulations, the Working Time Regulations and the Equality Act, can sometimes apply even in the absence of a direct contractual relationship.
HMRC itself fell into this trap and, last year, found itself being sued for holiday pay by one of its own contractors.
IR35 offers a unique opportunity to audit possible employment risks in all contexts.
If IR35 does apply, an obvious solution is to contract directly with the individual in question, and clarify the extent of any employment obligations within that contract.
Although it might seem unattractive to offer any employment rights at all, this option provides more flexibility than it first appears.
A fixed term contract, or a part-time or zero-hours arrangement, are all possibilities, not only a permanent employment contract.
Nor need it necessarily be expensive.
There are few legal restrictions to prevent costs from being passed onto the individual, or indeed onto any intermediaries which remain – the main considerations are purely commercial ones.
We advise against making any assumptions about what contractors will want.
There will be some individuals who choose to work through personal services companies for tax reasons, and will resist any arrangements which cause them to lose such benefits, but there will be others for whom employment rights are more important, and will be willing to accept a pay reduction in exchange for more security.
It is important to consult with contractors, because they will have to agree any changes to terms.
Holiday pay compliance can be achieved at no extra cost, so long as the arrangements are clear, simply by reducing the basic rate of pay and giving any shortfall back to the individual as holiday pay.
But if the arrangements are not clear, it will be assumed that any extra costs are to be borne by the client receiving the services, which is why it is important to be proactive in addressing this issue.
Pension auto-enrolment can also be done in a way which causes no overall loss to either contractors or clients. Indeed, if there is a reduced salary but increased contributions, this is one small way of continuing to enjoy some tax benefits.
Businesses are encouraged to undertake a review of their use of contractors and plan for the forthcoming rule change.
Our team of IR35 experts (see right) are ready to assist with that process and answer any questions businesses may have about adapting to the new legislative framework.