Avoid Paying IR35 Tax
Hiring companies can help contractors and freelancers avoid paying IR35 tax in just a few short steps. When contractors decided their own IR35 status companies tended to believe it was their problem. With the new IR35 changes in the private sector it is now both of their problems.
Helping contractors to avoid paying IR35 tax will be beneficial to both of them. Small changes to contracts and the way contractors work should take them outside IR35. It is all about differentiating contractors contracts and working practices form those of employees.
Advice to Companies to Help Contractors Avoid Paying IR35 Tax
- Hire Contractors for Projects or Tasks rather than for fixed time periods
- Don’t have notice periods in the contracts
- Agree which equipment to use
- Agree where the work should be done
- Agree the timescale for the work to be done
- Allow a substitute to be used
- Companies should not put contractors on company hierarchy charts
- Give contractors opportunity to benefit from sound management
- Companies should make clear their intentions when hiring contractors
- Companies can help contractors to avoid paying IR35 tax
Hire Contractors For Projects or Tasks Rather Than for Fixed Time Periods
Typically, if a company has a project that they expect to last 9 months they’ll hire a contractor for three months, then renew them every tree months till the project ends. It would be much better if they hired them for the whole project. If the contractor is not up to standard they can get rid of them more usually because of the next piece of advice
Don’t Have Notice Periods in the Contracts
It is best that the contract between the contractor, company and agency does not have a notice period. If it does it should be different from those of employees. This should help to show hat the relationship is a contractor for services. It should also show that there s no mutuality of obligation. So, his should help contractors avoid paying IR35 tax.
Agree Which Equipment to Use
The company tells employees which equipment they should use. They should agree this with contractors. It may be a mix between the company’s own equipment an the contractor’s or it may all be the company’s equipment.
However, this should be agreed between the two parties rather than imposed on the contractors. The agreement should be documented and signed by the two parties.
Agree Where the Work Should Be Done
The company should not dictate to the contractor where the work should be done. This should be agreed between the two parties. It may be best to do it all at the company’s site, or it may be best to do some at the contractor’s own home office. Or it may be done at a third party site, e.g. a customer of the company. This should be agreed between the two parties, documented and signed by both parties.
Agree the Timescale for the Work to Be Done
The company tells the employee how long a task will take. The employee will endeavour to do it in that time. The contractor will agree with the company how long a task should take. It can work both ways. Either the company can come up with an estimate and then agree that with the contractor or the contractor can come up with an estimate and agree it with the company.
Allow a Substitute to be Used
Companies should allow contractors the right of substitution in their contracts. This is for when the contractor can’t make it or can’t do the work for some reason. The company would have to agree any substitute that the contractor proposes.
HMRC claimed, at one IR35 tribunal case that, as the substitute wasn’t used that pointed to IR35. However, the judge ruled that the burden of proof lay with HMRC. To rule that it was a sham there would have had to have been an occasion when a substitute needed to be named and the contractor couldn’t provide one.
Companies Should Not Put Contractors on Company Hierarchy Charts
Companies should refrain from putting contractors on their company hierarchy charts. Indeed it would be a good idea to have separate customer / supplier charts for contractors.
If badges are needed e.g. for security reasons, make sure that the badge shows the name of the limited company / supplier that the contractor operates through rather than the name of the company that he or she provides services to.
Give Contractors Opportunity to Benefit from Sound Management
A tribunal judge has already agreed that a renewal of contract can show that contractors benefit from sound management. Employees don’t get renewed.
However, companies could also consider paying contractors a bonus for finishing tasks early. That would show them benefiting from sound management. That would mean that contractors are paid different amounts each month or week whchshould help them avoid paying IR35 tax.
It would also be a great boon to the company and project if contractors finished a lot of their tasks early.
Companies Should Make Clear Their Intentions When Using a Contractor
The intentions of the parties is an indicator of IR35. So the company should make very clear in the contract that this is a contract for services. The contractor should make clear that they are offering a contract for services.
Companies Can Help Contractors Avoid Paying IR35 Tax
If companies and contractors jointly made all these changes to their contracts and working practices when hiring contractors, ii would go a very, very, long way to taking the contractors outside IR35. It would help greatly contractors to avoid paying IR35 tax.
It would also mean that a company could retain and hire the very best freelance talent for their projects.
If you know any companies who are wondering what to do about the new IR35 changes then pass this article on to them.
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