To be captured or to not be captured, how would you know?
If you’re a contractor working via your own limited company in year 2020/21, then the phrase “captured by IR35” will strike fear to your very core! Any research in the IR35 will suggest you find out if you are captured or not. But not much of it will tell you in plain terms if you are captured and how to work it out. In this article, I will explain the key things as a contractor, you must understand to determine if you will be captured by the IR35 legislation and why it means so much.
Hopefully, you have read my previous articles, so you should know what IR35 is. if not I would suggest giving that a read before you continue with this article. Let’s remember that the fundamental reason for IR35 is to ensure tax compliance within the flexible workforce and ensure that HMRC and the Treasury receive the correct amount of tax from everyone. The PAYE model does this very well, but limited company contractors manage their own tax submission, and people make errors or intentionally try to defraud the system.
To manage this, contractors who want to operate through their own business must be genuinely self-employed, and this is what IR35 measures, “Are you a disguised employee?”. Now let’s be honest the liability for this determination sits with the client post-April 2021. But as a contractor, it’s wise to understand if you’re captured regardless of a clients decision. So how do you do this?
Here are 4 simple things to help you understand if you are captured!
1 – Same job as the person next to you
This will seem like a strange thing to ask but, is the person next to you or someone in the business performing the same task and duties you do, only as a permanent employee? Now if the answer is yes, it’s not 100% that you are captured. But the question seeks to understand if your skills are required on a project basis or are your skills, in fact, a permanent requirement. And therefore your contact role should be a permanent one if this is true then HMRC would see your role as captured by IR35. The justification for a contractor may be that the requirement is a short assignment with no guarantee of work afterwards. But if you have been with the client for an extended period and worked multiple projects under the original contract. It might be worth discussing this with the client.
2 – How are you managed?
The idea of a client hiring a contractor is to hire them to fill a skills gap, a gap they don’t have the skills for internally and with this have no idea how to tell them how to do the work. Now, this doesn’t mean they cannot manage the contractor i.e. checking progress, meetings about milestones, delivering project updates are all fine. But if the daily routine is the client providing a list of tasks to complete and then advising on how the contractor completes the tasks. If this sounds like your contract assignment, you may need to be concerned about your status as a contractor.
3 – What’s in the contract?
As a culture, we very rarely read the terms and conditions. It’s by far easier to tick the little box. And hey if it’s not legal then it doesn’t count right? But as a limited company contractor, you have to know what’s in the contract, ignoring this could be the first stumble on a very long road to a tax penalty.
4 – What are the benefits like?
We all like benefits but not all of us should get them. Employee benefits are exactly for employees if as a contractor, you are getting invited to the Christmas party, use of the company car or discounted meals in the canteen. Then you are opening up yourself for an investigation, as a contractor, you shouldn’t be accepting any of the benefits provided to employees.
And there it is, take a look over your current assignment and measure yourself against the above, this will give you a good idea if you might be captured or not. Now, there are many other elements you can take into account but if you follow the explanations above, you stand a good chance at being a contractor and not a disguised employee.