Welcome to Contractor Corner, our series designed specifically for accountants with clients who are contractors
Public sector contractors having hard time
As if things were not difficult enough for contractors working within the public sector, many contractors have been approached with a view to signing a new Contingent Labour Contract (CN1), which having personally reviewed certainly would do very little to put a contractor’s status on the right footing – rather the opposite! The contingent labour one contract is intended to be used for all public sector organisations and will be administered solely by Capita. While other agencies will still be able to recruit for public sector contract work, their contract would be with Capita, rather than the government body themselves.
Many contractors have been up in arms regarding the new contract due to its shortcomings in terms of IR35, however all does not seem to be lost and Capita have been taking on board comments from contractors and negotiations seem to be taking place with regard to what can be done.
While the contract alone is not at all good with regard to IR35, if your working practices are very strong in terms of IR35 and do not reflect the contract then of course there would be grounds to mount a successful defence in the event of an IR35 enquiry – confirmation of your working practices could prove very useful in this respect. Despite the above, a degree of sympathy has been felt by the House of Lords in their recent report and one of their recommendations was that there should be more consistency in the application of the Public Sector Guidelines and that the application of the guidance set out of the policy procurement note is monitored more closely.
Onshore employment intermediaries – false self-employment rules
Following recent consultation and this year’s Budget, the Government announced its intention to legislate against the perceived problem of false employment created by employment intermediaries. HMRC estimates that around 200,000 workers in the construction sector and another 50,000 workers in other sectors such as driving, catering and security, are being dressed up as self-employed, typically because of a bogus right of substitution.
Finance Bill 2014 proposes to remove the requirement for personal service from the current Agency Legislation and focus solely on the right of control as the determining factor as to whether a worker is self-employed or not. Where a worker is engaged by or through an employment business then there will be a presumption that there is control over the worker and it will be up to the employment intermediary to prove otherwise.
As from the 6th April 2014, an employment intermediary or the agency, where an agency is involved, will be responsible for the deduction of PAYE and NIC, where a worker is deemed to be an employee.
Reporting requirements: From April 2015 employment intermediaries and agencies will be required to submit a simple quarterly electronic return containing details of any workers not accounted for through RTI. Penalties will also be applied for late or incorrect returns.In support of their reporting requirements employment businesses will be required to hold extensive personal details of self-employed workers.
Targeted Anti-Avoidance Rule (TAAR): A TAAR will be introduced to prevent employment intermediaries from circumventing the new Agency Legislation, for example forcing existing workers to operate through Personal Service Companies.
HMRC have said that they will commence targeted compliance activity from the start of 2014/15, so time is of the essence!
What is the best way for a contractor to protect themselves against IR35?
To actually provide a substitute is the short answer. Providing a substitute will attribute a score of 20 points on the business entity test, which for many contractors would result in a low risk score. HMRC have stated that where they write to undertake an IR35 enquiry, if a contractor can demonstrate that they have a low risk score on the Business Entity Test (BET) and can provide sufficient evidence of this, then HMRC will close the enquiry and will not seek to undertake a further IR35 enquiry for the next three years provided that the circumstances do not change within this time.
A contractor should ensure that they ideally utilise the right to provide a substitute every couple of years at least, and preferably for each contract. The actual substitution test on HMRC’s BET asks if you have provided a substitute within the last 24 months, so in order to get the 20 points you would have to have provided a substitute within this time.
The substitute could be utilised only for a short period of time; one day would be sufficient and ensure that the contractor’s limited company is responsible for the payment of a substitute. The contractor will need to keep hold of the written correspondence (this could be by email or letter format) between their limited company and the client agreeing to the substitute along with the payment trail from the end client to the limited company and from the limited company to the substitute, to confirm that the company has paid the substitute.
Regardless of HMRC’s BET exercising a right to provide a substitute will make it much more difficult for HMRC to argue that a contractor is caught by IR35, where it can be clearly demonstrated that there is no requirement for personal service.
IR35 Q&A – ask the experts
I am a contractor and have been engaged with the same client for over two years, does this mean that I am caught by IR35?
The 24-month rule is one of the biggest myths with regards to IR35 and many contractors believe that having a contract that continues for longer than two years automatically puts them within IR35.
As a self-employed contractor in business on your own account, there is no reason why you can’t accept contracts that are commercially viable to you. Should this mean that you accept a contract that takes you past two years with the same client, this does not mean that you will be caught by IR35.
What the 24-month rule does mean is that once a contractor knows that their contract is going to exceed 24 months HMRC class the client’s site as the permanent place of work and therefore no further travelling expenses can be claimed.
Shorter-term contracts, with no obligation on either party to extend the contract are a better indication of genuine self-employment, however length of service actually has little bearing in an IR35 enquiry, where a contractor’s working practices are strong in terms of IR35.
The danger with longer term contracts, is that it is very easy to become integrated within the client’s organisation, therefore it is essential that you are identifiable as a contractor and not entitled to employee related benefits, such as employee related social events etc.
The most important IR35 tests are a genuine right of substitution and control and if you can still demonstrate that these exist, along with ensuring that you are not entitled to employee benefits and are clearly identifiable and recognised as a contractor, then providing your services for the same client for over two years should not affect a contractor’s IR35 status.
This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896
