It’s very possible for your Company to hire Ltd company Contractors entirely risk and liability free. I’ll explain the simple legal reasons how.
Firstly, I ought to caveat the above statement by adding ‘providing IR35 is managed correctly’. IR35 is no different to any other area of Law, if you don’t have the depth of legal expertise required, you are going to leave yourself unnecessarily exposed. Too often I’ve seen Companies try to self-manage IR35 with hastily constructed internal teams, yet no Legal IR35 specialism to call upon. IR35 hinges on 20+ years of case law, ever changing, it’s far too complex for a novice to be expected to apply correctly. I suspect that is by design as far as HMRC are concerned.
A quick introduction before I address the topic directly. I’m a self-confessed IR35 obsessive. Since becoming a qualified Legal professional in early 2000, I’ve dedicated the past 15 years purely to IR35, immersing myself in the complexities of the legislation. It’s been my aim to become an authority voice on the subject, something I’m very proud of. During my time I’ve worked with over 2,000 Clients, drafted over 6,000 IR35 contracts and represented Clients at over 100 HMRC IR35 enquiries, all comfortably and successfully. (hint: it’s all very straightforward if you know your subject matter better than HMRC does)
IR35 is a problem worth solving
IR35 represents a huge opportunity for companies to gain a competitive advantage.
Aside from the fact that engaging contractors outside IR35 compliantly is c.30% cheaper for the Client (a typical saving of £25,000 per contractor, saving £millions off your bottom line), the undeniable difference is the superior calibre of contractor you are able to attract, and your ability to retain them. This all positively impacts company performance.
The converse is also true, if you try to engage contractors inside IR35, the chances are you’ll struggle to find them, to retain them, and you’ll pay a huge premium, often for sub-calibre candidates.
I recognise that many companies are currently paralysed by the perceived risks of engaging contractors outside IR35, there’s plenty enough negativity written on the subject if you go hunting. However this is primarily due to a misunderstanding of the legalities of IR35, hence the reason why I’m taking the opportunity to provide reassurance and legal clarity on the subject.
IR35 can be 100% risk free for hiring companies, if you take 2 simple steps
This is not my subjective opinion, it’s a simple matter of Law. All you need to do is the following:
- Satisfy HMRC’s requirement for ‘reasonable care’ with the management of IR35
- Ensure a 3rd Party always pays the Ltd contractor, even if you hire directly.
It’s really as easy as that. Tick both those 2 boxes and there is no IR35 risk or liability for your Business.
Let us address each step In more depth.
Step 1: Satisfy HMRC’s ‘reasonable care’ requirement
The law is clear, if you satisfy ‘reasonable care’ with your management of IR35, you pass all the risk and liability of working with contractors outside IR35 to the ‘fee payer’, the company that actually pays the Ltd contractor’s bill. Invariably this is the MSP or Recruiter.
This may be news to many, it tends not to be widely known as many Recruiters don’t like to volunteer this information to their clients, for fairly obvious reasons.
Ok, so what is reasonable care and how do you satisfy it?
It’s perfectly achievable, requiring some effort. There should be strong motivation to do so.
Firstly, If you’re a large company (£100m+ turnover) it’s unlikely you’ll be able to satisfy reasonable care by choosing solely to manage IR35 internally, unless you have legal qualified IR35 resources supporting each and every contractor engagement. The case of Collis v The Commissioners for Her Majesty’s Revenue and Customs TC/2011/2813 indicates that reasonable care will be relative to the size of the organisation in question. Simply put, the expectation is that larger companies should have access to specialist IR35 legal resources to manage all assignments, anything less will be viewed as cutting corners.
Reasonable care involves end-to-end management of IR35. This goes beyond basic inside/outside assessments, it requires contract drafting, SOW creation (as outside IR35 contractor assignments must be structured as such) and strict monitoring for compliance throughout the assignment. Failure to do all of the above and you won’t be ticking the required boxes.
The easiest solution is to involve or outsource IR35 management to IR35 Legal Specialists. HMRC specifically state ‘using a professional qualified advisor’ constitutes reasonable care, but they must be directly involved in each and every contractor assignment. Our unique Managed Service provides this for clients, very affordably, taking care of the entire headache for our clients.
The alternative is to do it yourself, managing IR35 internally using your own resources, but tread very carefully as recent cases warn this could be your undoing. It’s likely a false economy, here’s why:
As Defra, Ministry of Justice (MoJ) and the Home Office have found out in recent months, self-managing IR35 fails to satisfy HMRC’s view of reasonable care, leaving them exposed. MoJ themselves incurred a £15m penalty simply for failing to manage IR35 correctly, despite using HMRC’s own CEST tool for the determinations.
A key learning is the vulnerability caused by use of CEST, or indeed any IR35 assessment software tool. It’s shown to be a high risk approach for two key reasons:
- It can be easily manipulated. It doesn’t take a rocket scientist to work out if you put certain answers in, you’ll get the result you may desire. HMRC are very aware of this, if the reality doesn’t match the answers, it’s not worth the effort.
- The Contract is the key ingredient, but CEST (or other tools) have no sight of this. In our experience of HMRC’s inquiries, the Contract & SOW is their first port of call, not an SDS. They’ll then turn to the working practice reality, which again software tools don’t control.
In our experience, IR35 can only be managed safely with a depth of legal knowledge that very few companies possess. Each and every contractor assignment has it’s own set of nuances, it’s important to assess these correctly whilst then ensuring the paperwork matches the reality and is monitored for change control.
Do this, and you’ll satisfy reasonable care, the first key ingredient.
Step 2: Ensure a 3rd Party always pays the Ltd contractor
Assuming you’ve satisfied reasonable care, you’ll now need to pass the liability and risk over to someone else. If you source your Ltd contractors via Recruiters, they pick this risk up. Similarly with an MSP you may have in place.
If you’re sourcing a % of your Ltd contractors directly, consider introducing a 3rd party to pay them directly for you. We have partners that provide this service for around 2.5% fee, a modest uplift for shifting all the IR35 risk to their door.
In reality, there is no significant IR35 risk to pass over. If you manage it correctly, with watertight contracts and a change control process, HMRC will find no scope to challenge. However by satisfying Steps 1 & 2, you will eliminate all your risk anyway. You can engage self-employed contractors safely, reaping the productivity and cost benefits.
Will you pass an HMRC IR35 enquiry?
Take our 5 minute online IR35 risk assessment to find out
HMRC’s soft landing period has ended and IR35 enquiries will soon begin in the private sector. Make sure you identify any risk areas and ensure you’re managing it correctly.
IR35: The time to adapt is now
HMRC themselves state 2/3rd (66%) of contractors should be compliantly working with their clients outside IR35.
The current reality is very different, many private sector companies taking an overly risk-averse approach, lead primarily by a lack of IR35 knowledge, which is understandable. Companies need to adapt to IR35, to learn to work differently with self-employed contractors, to revert from an Employer-Employee approach to a Client-Supplier approach. This is all achievable with expert help and guidance.
The flexible workforce is an integral part of any successful company. Contractors are a key ingredient to success, forward thinking companies now need to take the steps to adapt, the benefits are unquestionable.
It can also be 100% risk free.
About IR35 Pro
IR35 Pro offers a unique fully managed service for IR35, taking responsibility for the entire end-to-end process. Using our workflow, we manage contractors for clients big and small, with an all-inclusive day rate approach to pricing, ensuring clients are guaranteed a positive ROI from our service. Our legal team is led by Martyn Valentine, considered the most experienced legal expert on IR35.
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