What Is An IR35 Compliant Contract?

Under the new off-payroll working rules, public sector bodies and medium-to-large private sector businesses are now responsible for IR35 compliance.

Although the written contract you have with contingent workers is important, arguably the working practices they operate under are ultimately the deciding factor of actual IR35 status.

In this article written especially for employers who want their contractors to operate outside IR35, we cover:

What a contractor is
What IR35 is used for
Why HMRC are so keen on it
Why you’re now in charge of IR35
Creating an IR35-compliant contract
The key employment tests HMRC use to judge IR35 status
Turning the new IR35 rules to your advantage.

For more information on IR35 compliance for employers, please call +44 (0) 203 051 9792, email [email protected] or fill out the form below.

What is a contractor?

Under IR35, sometimes called the Intermediaries Legislation, a contractor is generally a third party expert offering their services via their own limited company (often referred to as a personal service company).

Why IR35 is used to determine

The history of IR35 stretches back decades. It became law in 1999 and has been subject to multiple revisions ever since.

It was introduced to stop the “Friday Monday phenomenon”. This was when a worker (standard, salaried employee) left their job only to resume it as an independent contractor on Monday morning.

IR35 is really an “employment relationship” test. Is a contractor’s employment status with your company that of an independent business owner who could be best described as self-employment? Or are your contractors really “disguised employees”, to use HMRC’s term?

Why was IR35 introduced?

Contractors do not pay the same income tax and National Insurance contributions as employees. Clients do not pay National Insurance Employers’ Contributions nor (if applicable) the Apprenticeship Levy either.

If a contractor earns £100,000 a year through their own personal service company and withdraws all of their profits in dividends, HMRC gets £31,193. If they were an employee, HMRC’s take is £49,139. (Figures correct 2022/23 tax year).

So, HMRC loses a lot of money and they want it back.

What you as the employer need to do

Previously, employers relied on IR35 self-determination from their contractors and agency workers. This changed in April 2017 as all public sector bodies became responsible for determining the IR35 status of their contractors. This was extended to medium-to-large businesses in April 2021.

As the body or company receiving the benefits of the contractor’s service, you are the “end client”. If you recruit contractors direct and are responsible for paying them, you are also the “fee payer”.

If you find employers via a recruitment agency and they’re responsible for paying contractors’ invoices, then they are the “fee payer”.

CoComply note: In most cases, the “end client” and “fee payer” is clear. However, depending on how you pay your recruitment agency, it may not be this straightforward. There is also ambiguity for firms placing part-time (fractional) directors within client’s firms depending on the nature of the engagement. Please contact us to find out more.

As the end client, you must create an IR35 status determination statement for each contractor. This describes the working practices under which a contractor operates and whether that arrangement is inside or outside IR35.

As the end client, you must distribute the statement to the contractor and to all parties in the supply chain (like recruiters).

Creating valid contracts and compliant working practices as the end client

When contractors provide services to your company, it’s important they have a well-written contract that reflects the true circumstances of a contractor’s engagement with you.

You can download an IR35 contract template from a number of online sources. It’s even easy to find a specific outside IR35 contract template but we would strongly advise you against doing so.

The reason for this is that IR35 compliance does not begin and end with the written contract. You need to think about the steps you take to keep a contractor outside IR35 until the contract ends.

It’s easy to complete outside IR35 compliant model contracts but, if upon investigation by HMRC, they are judged not to be self-employed by a disguised employee, the financial risk to your company is severe.

Think of your written contract as baking in the working conditions your contractor requires to be outside IR35.

CoComply note – we strongly advise against using verbal contracts when hiring a contractor.

Planning for compliance with the three key employment tests

When planning an outside IR35 engagement with an employer, it should comply with the following key employment tests:

Substitution clause. Your contractor must be able to send someone else in to provide the services agreed upon if they choose. They should not have to personally provide a service to you.
Control. The less control you have over how, when and where from your contractors work, the better.
Mutuality of obligation. You should not feel obliged to provide work to your contractor nor should your contractor be obliged to accept it.

Other important factors to consider are:

Exclusivity. Your contractor should be free to work for other clients as they please.
Financial position. If your contractor makes a mistake, they should be responsible for meeting the costs of rectifying it on their own account.
Equipment. Where possible, your contractor should provide as much of their own equipment as possible to carry out the specific service you have hired them for.
Additional services. Any work you wish a contractor to carry out not covered in the original written contract should be included in an amended contract or a brand new contract.

Turn the new off-payroll working rules to your advantage

There is over 20 years of case law surrounding IR35 – a particularly complex area of employment law. If you do use an IR35 contract template, you should speak with a suitably qualified person for specialist advice on its legitimacy.

Better still, work with CoComply to make sure that, for all your contractors, you have an outside IR35 compliant written contract with working practices are compliant too.

We understand the temptation many public sector bodies and private sector businesses feel to declare all contractor work inside IR35. This costs you a lot more money and it makes the opportunities to offer to contractors far less attractive.

Please remember that the rules have not changed, it’s just that the responsibility has shifted to you for compliance. For help in creating an environment where you and your contractors can achieve more at a greatly reduced cost, please get in touch with us.