We said in Part 1 of this series that the application of “new” IR35 to make private sector end-users liable to deduct tax on contractor payments would depend in part upon the tasks your contractor is hired to undertake. In particular, are they at heart employee-type responsibilities?
There are a number of pointers which HMRC will consider:-
- duration of engagement – the longer this is, the harder it becomes for the end-user to argue that the individual would not be doing an employee’s role if it were not for the intervening personal services company. How long is too long will vary with the facts of each case. It would be entirely possible to hire external specialist assistance for a couple of years for an extended but ultimately finite major IT project, for example, but much harder to defend using a contractor for the same period just to pad out the Accounts Department because you were a bit short-handed.
- It will therefore almost inevitably be best that your contractor PSC contracts are for a fixed term. If objective grounds can be shown to exist at that time you can agree to renew it on expiry, though note of course that repeated renewals will inevitably cast doubt on the genuineness of the initial contract period chosen.
- prior performance of the tasks – if the job used to be done by one of your employees, you go into the debate with HMRC a goal down already. If it used to be done by that same individual prior to his “redundancy” or resignation and re-hire via a PSC, you are two down before half time, and if he is also now treated as if he had never left, it is basically not worth getting on the team bus in the first place.
- integration – as a matter of broad impression, the more a contractor’s role is integral to the end-user’s business, the more likely he is to be caught by new IR35. Does he have his shoulder to the corporate wheel like all your Schedule E employees, or is he merely advising them on how to push to best effect? From this perspective, an expressly advisory role is good and an operational one much less so. Holding an internal title is bad news for the same reason, along with end-user business cards. At best, these should show very clearly that the individual is a contractor: “John Smith of J Smith & Co Limited, providing services to [end-user name]“. Even then, best avoided if possible for the impression of duration and integration which your production of personalised stationery for him would suggest.
- expertise – ideally your contractor should be doing something which you do not have the skills to do in-house (because if you did, you would use the employee to do it). The possession of some specialist skill or qualification is very much the sign of someone in a business of their own trading off that expertise. That might be technical – high-level IT skills of a sort not required for the routine functioning of your IT department, for example – or less tangible, such as advice to management concerning a proposed growth strategy or someone who brings the social media skills required for a particular marketing campaign. However, if your contractor is sitting day-in day-out next to an employee who does essentially the same thing, then he is clearly just there to make up the numbers and that will not get past HMRC.
- While the written contract is obviously not determinative, the task description should focus on the particular expertise the contractor brings to the end-user, and what it is expected that he will do with it to the end-user’s benefit.
Therefore overall you should be looking for the contractor’s role to be:-
- time limited;
- doing something clever not previously or currently done by your actual employees;
- which is ancillary to your main business rather than an integral part of it; and
- for a particular specified purpose other than the traditional function of enabling you to mislead your Head Office about FTE levels.