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Agency Reimbursed Expenses Explained
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Your Contract: IR35 Determination
Some time ago, HMRC determined that a minority of contractors opting to work via their own ltd company (or Personal Service Company/PSC) were performing roles in a “disguised employee” context, i.e. they were being paid via their company for work that is justifiably that of a regular employee. From HMRC’s vantage point these individuals should be subject to regular tax, National Insurance, and other deductions on a PAYE basis.
IR35 was created to reduce this form of trading, and in April 2021 its application was extended the UK’s private sector. If your contract/assignment is deemed inside IR35, you will be asked to operate as an employee.
Some end clients are taking the ‘blanket’ approach and classing all roles inside of IR35 as a protective measure, as inaccuracies can be very costly.
If your SDS (Status Determination Status) demonstrates that your contract is outside IR35 parameters then you will be able to continue your work as an ltd company.
Inside or outside – who decides?
The intermediaries Legislation has been updated over recent years and in 2017 we saw changes to the rules applied to the public sector.
In previous years, it had been the responsibility of the contractor to determine their assignment’s IR35 status, however, the perception from HMRC was that the rules were not necessarily being applied correctly.
With this in mind, they decided that it would now be the responsibility of the engager (end client for the most part) to determine the status – if an inside IR35 verdict was concluded then employment taxes would be due. These would have to be deducted at source by the end client unless the contractor opted to work via an umbrella company, in which case the umbrella would ensure that these taxes were paid over HMRC.
The government’s introduction of the legislation in the private sector will impact thousands of contractors and limited companies.
Key factors to consider
Even though the determination sits with the engager, it is important that you understand how determination takes place –There are four key areas that are required within the contract to ensure you are outside IR35 are:
Supervision, Direction, and Control: Does someone tell you what to do, when, and how to do it?
If you are given regular instruction and a thorough task direction, your assignment is more likely to be inside IR35.
Mutuality of Obligation: Are you obliged to accept work and is the agency/client obliged to offer it to you?
If yes, your assignment is more likely to be inside IR35.
Right of Substitution: If you can’t work for any reason would you be allowed to send someone in as a replacement?
If no, your assignment is more likely to be inside IR35.
To be identified as self-employed and therefore outside IR35, your relationship with the client must be business to business. Here are some key factors:
- Supply your own insurance.
- The ability to have several contracts running concurrently. Self-employed contractors usually take a higher degree of risk financially when accepting assignments and are held responsible for errors and would need to rectify them in your own time. Being able to exhibit that you are expected to correct errors without charging additional fees.
- Providing your own equipment and training provision that is integral to the completion of the project.
- Payment Terms – If you are paid on a project by project basis rather than receiving a consistent rate of pay like an employee
- You are not entitled or receiving any employee benefits.
- If the client can stipulate the place where you work and grand permission for time off and how the task is performed, this could be deemed as you working as an employee. It is worth ensuring that you are contracted for specific names of tasks and not perform alternative tasks to fill in the allotted time as this would be deemed as working as an employee, which can lead you to be inside IR35.
- Relationship with End Client – It is important that you perform your duties as a provider servicing a client. This can become more difficult if you are working with the client for a sustained period of time, or exclusively. It is important to maintain the professional boundaries set out within the contract.
- SDC – Supervision – For this to apply there must be someone overseeing another person doing work to ensure that they are actually doing it and that the work is being done to the required standard.
- Direction – this involves someone making another person do their work in a certain way, generally providing direction and guidance as to how the work should be done.
- Control – This applies to where you have someone dictating what work a person does and how they should go about it. This also includes the power to move a worker from task to task as and when priorities change. For example, if you are being mandated to complete structured workday hours this would imply employment, leaning towards being inside IR35
- Working Hours – If the contract has been set up to be completed under set working hours and isn’t flexible for the contract or service provided, this is more likely to fall inside IR35.
Once concluded, the end client is required to provide each contractor with a Status Determination Statement (SDS) relating to the assignment. It is worth noting that the actual status depends on what you do as much as what may be written in your contract.
Some companies offer services to re-write your contract to make it compliant with IR35 – if it accurately reflects what you do then that’s fine but if it bears no relation at all to what you do at work then you are more likely to be taking a risk in the event of an investigation by HMRC.
Working via an Umbrella
So, your latest assignment has been deemed inside IR35 and you are suddenly required to operate under an umbrella company employment… What does that mean for you?
Although Umbrellas don’t provide the tax flexibility associated with limited company trading, contractors use umbrella companies for a wide variety of reasons. PAYE schemes offer the easiest way to contract, and you will be free of the administrative obligations that are necessary for limited company contractors.
Umbrellas are seen as a ‘hassle-free’ way of contracting with the company taking care of all your invoicing, administration, and payroll processing. You’ll also benefit from full employee rights including holiday pay, sick pay, maternity/paternity pay, company pension plan, etc, even if you change agency or end client. Application is generally a quick and easy process and (if you find a reliable umbrella) payments will be consistent and accurate.