Can We Hire Through A Service Company And Avoid Insurance

Don't duck the issue of IR35 – here's the solution

Updated 25 April 2022

7min read

What is IR35 and how can you avoid beingness caught out by it? We explain what this controversial revenue enhancement change means for contractors and the businesses that hire them, and how to accept steps to reduce the chance of being sunk past the IR35 trap. Article past Nick Light-green.

Tips for dealing with IR35

Small businesses and freelancers alike have been bracing themselves for an imminent change in a slice of tax-abstention legislation. This has been pushed back thanks to the coronavirus, but it still means that from April 2021 private sector employers volition have to follow the same rules as the public sector with regard to IR35. The Federation of Minor Businesses has warned that both companies and contractors will feel the pinch.

What is IR35?

IR35 is also known as the 'off-payroll working rules'. IR35 is designed to foreclose workers from avoiding tax by operating as contractors, when really they are employees in all but name. So for example, if a contractor operates via their ain limited company, but is otherwise treated the aforementioned as their client's employees, they are considered to be 'inside IR35' and will need to make additional tax payments.

What is the new change concerning IR35?

IR35 was originally introduced by Gordon Brownish, to forestall employees from avoiding tax by being treated as contractors. However, since then the legislation has become notorious, sometimes implicating businesses that believed they were hiring contractors appropriately, just for HMRC to disagree.

Post-Apr 2021, private sector employers will exist held responsible for determining whether IR35 applies to any contractor they hire – which would require them to treat the contractor as an employee for taxation purposes. This is already the instance in the public sector.

Private sector businesses will therefore confront a tricky choice: go along to treat contractors equally contractors and risk a hefty fine if HMRC takes a dissimilar view – or treat them as employees with the additional costs and responsibilities this involves. At that place is widespread concern that genuine contractors will be classed every bit employees, and so will either have an unfair taxation hitting, or lose their contracts altogether.

Are you within or exterior IR35?

IR35 was introduced because of the way employees are treated differently from contractors. With an employee, an employer must provide a workplace pension, paid holiday, sick pay, other benefits (maybe) and pay employer's National Insurance contributions. A contractor, on the other hand, is paid a flat fee and can exist dismissed hands if there is no more work for them to do.

The vast majority of contractors operate as express companies, either one-person companies or 'umbrella' companies. Information technology'southward rare for contractors to exist sole traders, as unlimited liability brand this risky for them, while companies are wary of hiring them in instance HMRC thinks they are employees. Operating every bit a visitor also ways the contractor can pay less tax.

All the same, operating as a company doesn't forbid a contractor from beingness an employee in all just proper noun – which is where IR35 comes in. Broadly, IR35 says, 'If it looks like a duck and quacks like a duck, it's a duck.' In other words, if the contractor is working similar an employee, with similar obligations, and so they should exist treated as one for revenue enhancement purposes. HMRC therefore looks very closely at what it calls 'personal service companies'.

What's a personal service company?

Though the proper noun may sound dubious, a personal service company (PSC) is simply a visitor through which a contractor operates in lodge to do their freelance piece of work (considering well-nigh businesses won't hire a sole trader). The term isn't divers in law – HMRC only uses this label to describe companies that may be used as 'embrace' by contractors who are really employees in all but name.

This creates a double trouble, affecting both contractors and the businesses that want to employ them. If a concern is afraid that any contractor information technology hires might be considered an employee by HMRC, information technology may not risk hiring them at all. In this case, both the business and the contractor lose out. This is what many small business organisation fear will happen post-Apr 2021.

Tin I check my IR35 employment status?

HMRC offers an online tool, Bank check Employment Status for Taxation (CEST) that yous can apply to give yourself a general guide to your status. However, industry bodies (including IPSE, the Association of Independent Professionals and the Cocky-Employed) fearfulness information technology is still not fit for purpose. Contractors, recruitment agencies and finish-clients therefore shouldn't rely on it wholly when determining IR35 status.

The biggest problem with CEST: the MoO factor

One of the key deficiencies of the CEST tool is that it does not gene in 'Mutuality of Obligation' (MoO). Mutuality of Obligation is i of the defining characteristics of employment, in that the employee has certain obligations towards the employer, and vice versa. Many of these obligations do not apply to contractors (e.g. the contractor can choose where and how to evangelize the work, and can delegate information technology to an acquaintance if necessary; while the customer is not obliged to offer the contractor more work). MoO has been a decisive cistron in a number of recent IR35 tribunals, which is another reason why the CEST tool is still only a rough guide.

8 tips on how contractors and businesses can avoid IR35

Fears that the changes to IR35 will spell the decease of freelancing are exaggerated. By taking the appropriate steps, both contractors and businesses can ensure that they exercise not fall foul of IR35.

Remember, IR35 is something that applies to a role, rather than an individual. So only considering you were outside it on your terminal consignment, doesn't hateful that yous won't be within it on your adjacent one. For every consignment that you lot take on equally a contractor, the most of import thing is to exist able to prove that you are 'in business on your own account' and therefore non an employee.

Tips for proving you are 'in business on your ain business relationship'

If you are a contractor operating through a limited company (either your own or an umbrella company), HMRC may ask for evidence that you are genuinely freelance, and not but an employee of your client. Here are some ways that you lot could make your case.

one. Highlight the ways your work state of affairs differs from employees'

Genuine employees will have certain set working conditions, such every bit minimum hours, pension arrangements and other benefits, and mayhap subsidised services too. The employer also has a duty to provide work for them, which the employee has an obligation to do – and the employer can stipulate where and how the piece of work is to be carried out. You should be able to testify that petty if whatsoever of this applies to yous.

2. Keep client correspondence

If y'all accept emails that clearly land you are not under the control of a manager at the business, but are simply contracted to provide a service, this can be useful too.

iii. Don't proper name your company subsequently yourself

HMRC knows that a company named after a person may well exist just that person, and this fits their profile of a PSC. But if your company has a more 'business-like' name, e.thousand. XYZ Design, it emphasises the fact that your company is distinct from you, and that you could delegate the work to another person if necessary. Employees cannot delegate in this style, so it marks you out as different.

iv. Have your own marketing materials

You should be able to demonstrate that you marketplace your contracting services actively. Have a listing on relevant services website, post adverts and print business cards, all of which help to indicate that you are in business concern on your own account. Never use a business organization card which includes your client's branding!

5. Maintain your own office

A well-equipped role, even just in your own abode, will strongly imply that your work activities extend well across your electric current client. If you also invest in your ain software licences, trade literature and professional memberships, this can assist a peachy deal too.

half-dozen. Take out your own business concern insurance

Having your own business insurance, such as professional indemnity insurance, is a not bad way of demonstrating that you're not simply an employee.

vii. Invest in your professional person development

Employees don't pay for their own training, and so if y'all pay for yours this will be some other useful point of difference. Some professions may require you to have connected professional development (CPD) to remain qualified, so by paying for this you're too reasserting your contractor status.

8. Endeavour to take multiple clients at the same time

It's not e'er possible to arrange, but if your time is dissever fairly evenly between two or more than main clients, it's much harder for HMRC to claim y'all're an employee of any of them. Yet, having a very uneven split (e.g. 90 per cent of your income deriving from one customer) may be less convincing.

The more than of these strands of testify you can call upon, the more likely it is that HMRC will accept y'all are in business on your own account. Having just one or two on their own may non be plenty.

IR35 tips for businesses hiring contractors

If your business organisation hires contractors, either from time to fourth dimension or on an ongoing basis, so you should review your relationships with them to ensure they don't fall inside IR35.

From April 2021 it will be your responsibility to make up one's mind whether a worker is an employee or a contractor for tax purposes. You will have to issue a Status Decision Statement to your contractors, which makes their IR35 condition clear (inside or outside the rules) and explains why. As long equally you support your conclusion with sufficient evidence and file the appropriate tax documents, y'all should avert any penalties.

In summary, y'all should:

Review all your relationships with contractors and/or consultants
Make sure your terms of date are articulate and accurate
Provide contractors with their Status Determination Statement
Consider changing some contractors into employees if they fall within IR35 and if this is a more than practical solution for you both

Volition I accept to requite my contractors employment rights?

Some contractors who autumn inside IR35 and are treated every bit employees for tax purposes may feel they are entitled to total employment condition, with all the protections that go with it. There are many potential problems that can arise from this, such equally claims for backdated holiday pay, which will accept to be addressed on a case-by-case basis.

Ask your auditor to help you face up to IR35 with confidence.

Lucifer me I'd similar to speak to an auditor

About the author

Nick Green

Nick Green is a fiscal journalist writing for Unbiased.co.uk, the site that has helped over x million people find financial, business and legal communication. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.