Who Is A Contractor? 5 Tips for Identifying your Contractors

More and more regularly, CoComply is presented with a long list of suppliers pulled from a client finance or procurement system, with concerns around IR35 identification and compliance.

PSCs through a common independent contractor recruitment framework are easy enough to identify – those coming in via another channel like an umbrella company are less so.

CoComply is required to ‘wash’ the data, in order to identify the PSC* service providers and genuine sole traders providing services, to ensure that they are assessed in line with HMRC regulations.

To speak to the IR35 determination for employers specialists, please call CoComply on +44 (0) 203 051 9792, email hello@cocomply.co.uk or fill out the form below.

Does a contractor really run their own business?

Washing the data is a complex and onerous task, as identifying a self-employed person is not black and white, and rarely does the data contain the correct detail.

So, we apply a developed common sense logic, created by the UK’s leading IR35 experts, which helps identify independent contractors on whom you are legally obligated to carry out IR35 employment status compliance checks.

CoComply then works through this list of PSC suppliers providing services through their own limited company, undertaking the required IR35 compliance checks and keeping our clients off the HMRC “naughty list” and avoiding potential liabilities, which can often run into the millions of pounds in backdated, unpaid tax including income tax, National Insurance Contributions and (if applicable) Apprenticeship Levy payments for larger organisations.

The suppliers are then placed into the CoComply IR35 managed service, to oversee compliance for the life of the engagement with our client.

Identifying an independent contractor

So what advice can we give to organisations that wish to identify PSC suppliers from their own supplier list to ensure they remain compliant?  Here are 5 tips:

1. Have a clear methodology based on how HMRC identify a PSC.  Ensure that the broader circumstances are considered, such as relationships with other shareholders.

2. Make sure that the stakeholder for the project has a strong understanding of the entire legislation.  Not all of HMRC’s legislation is particularly clear, and therefore you have to make reasonable assumptions at times considering the logic that HMRC applies to other aspects of the off-payroll legislation and tax in general. Self-employed workers must not, for example, receive holiday or sick pay or any other employee benefits, or be perceived to be doing so.

3. Identification is easier if you have captured the main commercial lead and the main person delivering the services to your business.  The definition of a PSC hinges upon who is delivering the service (i.e. are they a working director) and does that individual hold shares in the organisation.

4. Undertake checks regularly.

5. Whilst you must take reasonable care to identify PSCs, issue notice to those that are un-identifiable and ask them to clarify status.  Not getting an answer?  Withholding payment for services protects your liability and nearly always results in a  sudden response.

An individual that holds material interest in the company like a shareholder, and is involved in the delivery of those services to your organisation (i.e. is a working director) is a PSC.

Therefore, we aren’t just looking for individual contractors.  And it could be that the individual does not hold shares in the company, but their spouse does, and that may also mean they are caught by the legislation.

Sound complex?

Well, it is, but HMRC expects greater levels of rigour and compliance the more complex your organisation is.  In practice, this means they will treat all organisations relatively, which means all organisations need to follow the right process and framework and get IR35 right.  Excuses that your organisation ‘is only medium sized’ or ‘is too complex to get this right’ will fall on deaf ears.

To speak with an expert in IR35 determination for employers, please call CoComply on +44 (0) 203 051 9792, email hello@cocomply.co.uk or fill out the form below.

Notes

*PSCs (personal service company) is the common term applied to workers operating through an intermediary.

** IR35 is the common term used to refer to both Chapter 8 and 10 of the ITEPA legislation.  Technically IR35 refers only to Chapter 8, which applies to only small businesses who are not impacted by the new legislation introduced in April 2021.  PSCs engaged by small businesses continue to be responsible for their own engagement Status.  The new legislation as of April 2021, Chapter 10, now applies to Medium and Large sized businesses, and is called the Off-Payroll legislation.