IR35: Solutions

February 15, 2021

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IR35: Solutions

A desk-top view with glasses, a pen, a keyboard, and small cacti next to Kilgannon & Partners branding for IR35 Solutions.

If having applied the status determination test you conclude that an individual is caught by IR35 and is really an employee, you need to decide what to do next. There are several options that we consider in more detail below.
1.      Do nothing   This is not advised. If HMRC decides to investigate your business, liability to pay NIC etc will sit with you as the end client, not the individual or his/her personal service company (PSC).  Moving the liability to the end client is the main change in April 2021 (albeit to medium and large businesses) whereas, currently, liability sits with the individual or his/her PSC.
You also face the risk that the individual will, at some point, claim to be your employee or worker and, if so, there will be liability for things like holiday pay and/or unfair dismissal.
As ever, burying your head in the sand is only likely to worsen the problem. The more time that passes, the bigger the liability/problem will become.
2.      Make the individual an employee
This is perhaps the outcome HMRC wants, some might say so it can collect more tax, but doing so has some significant practical considerations.
The individual may not want to be an employee but prefer to find some alternative solution where s/he can keep flexibility. Seeking to change their employment status may see them cease their relationship with you.
Your liability will increase significantly, as you will be required to treat them consistently with other employees; providing benefits (including pension), holiday and paying employers’ NIC (13.8%), so are realistically looking at a minimum 20% cost over and above their basic pay; assuming you are able to avoid any increase in their gross pay.
It is probably wishful thinking to expect a contractor to agree to continue working for you at no additional cost to you. This would see them suffer a massive reduction in pay and so is unlikely to be acceptable to them. 
Probably the biggest issue for the individual will be a potential reduction in net pay. Even if you agreed to maintain their contractor rate as their gross salary and you absorb the additional on-costs to you (say, 20% as above), the individual would face a reduction in net pay as they would not have the benefit of operating through a PSC. As such, are you prepared to increase their pay so they end up in the same net position? This will be a very expensive option. Further, where contractors are usually paid more to offset the lack of benefits and security, paying them more (or even maintaining their pay) is likely to put your pay scales out of kilter, and could create equal pay issues.
There is also an issue if you conclude the individual is an employee (or worker), the terms of ongoing employment cannot be agreed, and the relationship ends. If so, having concluded s/he is an employee, you risk a claim in the employment tribunal. You will have openly accepted the individual is an employee and they may decide to claim for unpaid holiday pay/pension/other benefits and/or unfair dismissal. As such, great care needs to be taken with this approach if this is your preferred option.
3.      Require them to operate through an employment agency or umbrella company. 
This should mean you can ignore IR35 provided you know they are employed by the agency/umbrella company.
However, while a safer option, this is probably the most expensive. The agency will be forced to pay employer’s NIC and provide benefits (pension as a minimum) and holiday. As such, it will charge all those costs to you. In addition, it will want to make a profit, so there is likely to be an additional fee on top, which you will have to pay. If they are provided to you via an agency, you will need to meet your obligations under the Agency Workers Regulations, which includes rights from day one and again after 12 weeks.
The same considerations above in point 2 also apply; will you seek a reduction in the individual’s pay to minimise your exposure and risk losing the contractor, or will you agree to match their current rate. 
4.      Change how the individual is engaged so s/he falls outside IR35.
This may not be possible. If it is, it is likely to see a change in how you operate and potentially how much control you can exercise over the individual.
It may mean you require them to provide equipment or take greater risk, it could be that they are encouraged to work for other businesses, however, if they are specialists, will you want them working for a competitor? Is it practical for them to have an unfettered right to supply a substitute? If not, you will have to impose some control over how/what they can do and who they can substitute.  Such control could be fatal to showing they are outside IR35.
Much like a change in their pay may see them earn less, a change in the working relationship may see them worse off or working in a way they are unhappy about.
While you can load indemnities into the contract, particularly around tax, ultimately, HMRC will look to you to pay tax/NIC in the event the individual is caught by IR35. If an individual remains working solely for you on a full-time basis, it may be hard to show s/he is not an employee.
If you are going to proceed with this option, there are some things to consider in both the contract you provide and the working arrangements that apply:
  • Allow the individual an unfettered right of substitution,
  • Allow them to set their own place of work and working hours,
  • Try not to integrate the worker into your work force; at least, not too much,
  • If possible, ensure the individual takes some risk and/or provides their own equipment,
  • Give them the right not to accept work and, ideally, have a mechanism of recording when work is either requested and refused or offered and refused,
  • Build in tax indemnities, and
  • Require them to have their own insurance.

While the contract can be used to portray the individual as self-employed, you need to ensure that the above reflects reality. All too often judges put the contract to one side and want to know how the relationship worked in practice; we suspect HMRC will be the same. Therefore, the contract should reflect reality and you should ideally find a way to demonstrate the terms reflect what happens in practice.
If any of the issues discussed above are a concern to you, or if you would like specific advice, please contact the writer, Matthew Kilgannon, via mk@kilgannonlaw.co.uk or on 01483 388 901 .

Kilgannon & Partners LLP is a specialist employment law firm where our experienced employment law partners offer practical, prompt and professional employment law and HR advice.  15 th February 2021. © Kilgannon & Partners LLP

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