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Many small businesses are not aware of the controversial tax legislation IR35 which is due to be rolled out to the private sector in April, according to a poll.
A survey out this week shows over half of self employed people do not know what the controversial IR35 legislation around employment status is, whether it applies to them and if so, why.
A poll of 2,000 self employed people by FreeAgent shows 57% don’t know what IR35 is.The legislation is designed to combat tax avoidance by workers and the firms hiring them, who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. It was originally introduced in the public sector and is due to be rolled out to the private sector in April. There have been a number of high-profile cases under the legislation.
There are fears that employers could avoid issues around employment status, responsibility for which will be transferred to them, by imposing blanket bans on using contractors working through personal service companies and that this could have a devastating impact on freelancers and contractors. The issue has come up during the election campaign, with the main parties saying they will review it, although no-one committing to halting it entirely as many contractors want.
The legislation has been heavily criticised by tax experts and the business community as being poorly conceived, badly implemented by HMRC and causing unnecessary costs and hardships for genuine small businesses – predictions of up to 25% losses in net income per worker have been made by experts. The poll suggests that communications around it has not been very effective either.
The research found that while 57% don’t know what IR35 is, 30% would like to see IR35 legislation for the private sector dropped. Only 12.9% want to retain the legislation. Over half (56%) of self-employed workers in the UK want the next government to cut taxes for small business.
Dave Chaplin, CEO of Contractor Calculator, gives his tips on how to avoid falling foul of IR35 legislation on disguised employment below:
1.Your client dictates your workload
You need to avoid any suggestion that your client controls you. The issue of control in IR35 cases has become key in determining ‘disguised employment’ since the Dragonfly IR35 ruling. Only carry out the job you were hired to do and the tasks detailed in your contract, and certainly never let your client move you from task to task or instruct you how to complete your work.
2. Your client won’t accept a substitution
The power to provide the client with a suitably qualified substitute is a clear indicator that you are not employed by your client and will keep you outside IR35. Aim to include a right of substitution clause in your contract or, even better, actually sending a substitute during the contract, will send a clear message to HMRC that you are, in fact, a true contractor. Get your legal adviser to negotiate a proper unfettered substitution clause in the contract and ensure that the client agrees to this in reality.
3. Your contract names you
Make sure you aren’t personally named in the contract, nor in any correspondence relating to it, as this could identify you as having to provide the services personally and therefore very likely to be inside IR35. The implication is that you are providing your services under an employment ‘contract of service’. The contract should be with your contractor limited company, proving you are providing ‘contract for services’ as a business-to-business service provider.
4. You agree to complete any tasks you are asked to do
Taking on any work that the client offers, and not just the tasks agreed in the contract, suggests that your client is obliged to offer you work and you are obliged to take it. This is called ‘mutuality of obligation’, or ‘MOO’, and is a strong indicator of employment and is likely to put you inside IR35. Only complete work agreed in the contract and, if alternative work is offered, either refuse to do it or get a fresh contract or contract addendum issued. Strictly avoid termination notice periods that require the client to give you work for that period.
5.You appraise your client’s personnel and you are appraised by the client
Appraising your client’s personnel, or taking part in your own appraisal with your client suggests that you are ‘part and parcel’ of the client’s organisation. HMRC is likely to infer that you are not in business on your own account and are, in fact, a ’disguised employee’ and therefore inside IR35. Never conduct appraisals don’t allow yourself to be appraised – that’s what happens to employees, not contractors.
6. You have to ask permission to take time off and/or being paid holiday and sick pay
Contractors should be careful how they manage holidays and time off. Informing your clients ahead of time that you are not going to be available is a professional courtesy to ensure that your client is not inconvenienced and can plan for your absence. However, you should never ask for permission to take holidays or time off sick, nor should you accept payment for time off, as this suggests that you are being controlled by the client and receiving the sort of benefits that employees receive. That is likely to put you firmly inside IR35.
7. You are named on the client’s organisation chart and have security/network log-ins and/or a client email address and business card
Whilst it is sometimes necessary to be branded by the client’s identity, and security or logistical reasons require you to have a client network log-in and email account, these should be avoided wherever possible as they suggest you are ‘part and parcel’ of the client’s business, and therefore inside IR35. You must avoid becoming part of the furniture and need to stand out from the employees.
8. Your contract prohibits you from working for other clients
If your client insists in the contract that you cannot work for other clients at the same time, this suggests that you are not in business on your own account and are potentially a disguised employee, and so inside IR35. Get your legal adviser to negotiate out any clauses restricting your business in this way. The only exception is when your client insists you cannot work for any of their competitors for a given time – this is a common feature in business-to-business contracts for services.
9. Your client pays for your training
If you allow your client to pay for training, this strongly suggests that you are ‘part and parcel’ of the client’s workforce and a disguised employee. As someone in business in their own right your limited company should pay for all of your training and development.
10. And finally… you organise the staff Christmas party!
Avoid becoming ‘part and parcel’ of their client’s organisation. Don’t use staff facilities like subsidised canteens or gyms, staff parking or even staff entrances. It might be inconvenient, but make sure you use the visitor’s car park, that you sign in every day, just like a visiting contractor would be expected to, and never, ever organise the Christmas party!