“Off payroll working” is coming under the spotlight again from April 6, 2020 – the beginning of the new tax year, and as the head of an IT department where contractors may be the mainstay of your teams, it may raise some difficult questions and resulting paperwork.
What is IR35?
It’s the tax legislation that affects those working for you via a limited company or partnership – those contractors who are not officially on the company payroll but who, were it not for the imposition of the limited company or partnership (the ‘intermediary’), would be deemed as fully employed by your company. They’re often subject to the same working conditions as full time employees – based in your offices, working the same hours and complying to company policies and procedures but not paying tax in the same manner a full-time employee would. These contractors are referred to as ‘disguised employees’ by HMRC and anyone working in this way will be caught out by new rules if they fail HMRC’s test. Those who do fail to meet the standards of HMRC’s ‘self-employed’ test will have their income treated as salary and have to pay full tax and NI and can only claim a limited set of expenses.
What does this mean for the IT department?
The IT department has traditionally hired its fair share of contractors – and this continues to be the case thanks to the growing skills gap for highly qualified technology roles. In light of the new IR35 legislation, CTO’s should be concerned in taking the correct steps when hiring and engaging with contractors and be mindful of how it may impact the retention of skills in a team. Many existing contractors are experienced technology personnel with many years of knowledge – finding people to fill those roles on a permanent basis is challenging in a marketplace where skills are in short supply and employees can almost name their price. A reduction on the reliance of contractors may be necessary but will be challenging to implement without impacting the dynamics of your in-house team.
Factors to consider when hiring
There is a list of conditions that HMRC considers when deciding whether contractors are truly self-employed or if they are disguised employees. You must consider the following points when hiring new contractors:
Self-employed contractors are free to work under their own control and are not ‘managed’ by you/the company. They can work from where they wish and are not under the control of the organisation. So, if your contractor must be sat in a desk in your offices Monday to Friday, 9-5pm to perform their role like a fully employed member of your team, then they might be deemed a disguised employee.
2. Financial Risk
Employees rarely risk financial loss by being employed, whereas a truly self-employed contractor may have bought assets or equipment which if you fail to pay them as a director of their own company, they will most likely experience financial loss.
If there is a clause in the contract you have with your contractor that says they can send someone else to perform the tasks you have contracted them to do, then they are self-employed and not obligated to be the only person performing the agreed tasks. If this is not the case, they may be deemed a disguised employee.
4. Equipment provided
Does your contractor have their own equipment – or do you prohibit the use of their own things as you might with a full-time member of your staff?
5. Fixed Notice Period
If the contract has a fixed notice period, your contractor is being treated as a full-time employee would be. There should be a provision in the contract for immediate termination.
6. Employee Benefits
A true self-employed contractor should not be receiving any kind of holiday pay, sick pay, pension, training courses or other perks that full time employees receive.
It’s unlikely your organisation will want to hire all contractors on a fixed term employment contract incurring all the extra employment taxes, company benefits and pension payments for each person. Undeniably this would be an expensive way of eliminating the problem of disguised employees and is extremely unlikely in terms of renegotiating with existing contractors the new rate necessary to offset new taxes. Add to that, the culture change of contractors becoming employees and the fact that they’d be unlikely to remain with your organisation for a long period of time. This really isn’t an option over the long-term if you want to hang on to the talent in your team.
Another consideration is working with a nearshore partner to deliver a more sustainable long-term solution. Such partnerships are not subject to the IR35 legislation as technical staff are employed by the partner organisation, not contracted or employed by you. Other benefits of using a partner organisation include having access to a pool of senior skills which can be ramped up or down based upon marketplace demand, retention of a team over much longer periods of time and much less worry around market factors pushing up salaries.
If you’d like to know more about the benefits of working with a nearshore partner versus hiring contractors or in-house employees, please read “Bridging the Tech Skills Gap”
Blog written by Paul Green, CCO at Godel Technologies.