Best Practice for Engaging Contractors

Engaging Contractors

Key Factors to Consider When Appointing Off-Payroll Workers

By implementing these practices throughout your business, including educating and training your employees who hire and utilise contractors, you will be best placed to engage with genuinely self-employed workers and discharge your duty of reasonable care under the Off-Payroll rules.

There is no clear definition of what makes someone employed for tax purposes, and the factors that determine an individual’s status for tax purposes derive from common law (the outcomes of court cases). There are a number of generally accepted criteria which assist in determining whether or not someone is an independent contractor, and therefore self-employed for tax purposes (outside IR35 where the contractor operates via a PSC), or an employee for tax purposes (inside IR35 where the contractor operates via a PSC).

Status Determination

Employment Status for Tax

Not all contractors are subject to the Off-Payroll rules. This guidance is designed primarily to support companies in their understanding and treatment of contractors who are PSCs, and therefore uses references to inside IR35 or outside IR35.

The main factors that determine employment status for tax are detailed below, although this is not an exhaustive list and the criteria will carry a different degree of weight and relevance depending on the individual circumstances of the assignments. It should also be noted that it is not so much a question of whether these factors or circumstances exist or not, it is the degree to which they are present or absent that really determines status.

It is also important to note that these factors and practices assist in the determination of status for tax purposes only, not for whether the contractor is eligible for any employment-related rights. Though similar factors are considered, the weighting and application of the factors is different.

When your business engages PSC contractors, you (or the recruitment agency supplying the PSC) should ensure that the worker providing the services holds an element of ownership or beneficial interest in the intermediary he or she is working through.

For limited companies, the worker must have some element of ownership of that limited company. Any amount of ownership in the limited company will be sufficient. For partnerships, the worker must be a partner and entitled to 60% of the profits of the partnership.

For more detail on the conditions to be fulfilled for the off-payroll rules to apply, please see here.

Every PSC contractor should be issued with a service contract for every engagement or assignment, with a clear scope included in those contracts. The service scope should contain at least the following information, and the working arrangements must reflect the wording of the service scope.

Role

Where possible, the role title itself should specify that the role is for a contractor and not a permanent employee. Furthermore, any identification required to be carried or used while onsite should clearly indicate which individuals are employees and which are contractors (different coloured lanyards, for example).

Job titles for contractors should be different from those used by your employees, since contractors should not be undertaking business as usual activities. The title should be specific to the piece of work or project that the contractor is engaged to support, and if the scope of the work being undertaken by a contractor changes over time, new contracts must be agreed and the scope of work and role title amended to confirm the new arrangements.

Any roles that carry statutory duties (called office-holders), such as company directors or company secretaries, are automatically deemed to be inside IR35.

Length of Engagement

All engagements should include in the service scope an anticipated start and end date or duration of time.

Generally, the longer an engagement lasts, the greater the risk of an individual being integrated into your business or mutuality of obligation developing between the parties. However, length of assignment is not in itself conclusive of a contractor’s status for tax purposes. There is an argument that the contractor is profiting from sound management (an indicator of self-employment) by managing to keep its customer loyal due to the quality of the services being provided.

It is therefore important that contractors who remain with the same business for long periods of time have clearly defined scopes of work, with defined timescales and contractual terms, for each assignment.

Notice periods

Where possible, notice periods for either party should be kept to a minimum or removed altogether. This supports self-employment because the contractor is taking on financial risk whereby he or she can be terminated at any time for any reason.

Where notice periods are required (for handovers or similar), the notice periods should be the same for both parties. If the contractor is required to provide a long notice period, but your business is not obliged to give any notice, this is an indicator that you are exerting control over the contractor.

It should be remembered that the requirement to give notice does not mean a contractor must be paid for the notice period unless he or she is actually working / delivering services during the notice period. Notice is just that, a notification of the upcoming termination of an assignment. A company is not bound to pay for the notice period if no services are being delivered during that time. This should be clearly specified in the terms and conditions with the PSC so that all parties are clear on the arrangements.

Working patterns

Generally, contractors should be obliged only to complete the scope of services agreed. When and where they choose to perform those services should be dictated by the contractor, not by the company engaging the contractor. Therefore, fixed patterns of work or specified days or hours per week should be avoided where possible.

As an expert with specialist skills, the worker him or herself should decide how and when the duties of the assignment are to be undertaken.

Description of Service

The levels of skill and knowledge which an individual possesses can be linked to the degree of control a company might exert over a contractor. True independent contractors are able to demonstrate that they have specialist skills and expertise, through the possession of relevant qualifications and/or work experience, and that they are able to work independently of the engager’s control as a result.

Contractors who are genuinely self-employed should only be engaged to work on a specific package of work or project.

Contractors should not be asked to manage permanent employees, as this may lead to an assumption that the contractor is becoming integrated into your business. This is because managers are key individuals within a business and are required to follow company policies as they relate to employees, such as undertaking appraisals, record keeping for sickness and holidays, initiating performance or disciplinary actions.

Equipment and Financial Risk

Where contractors take on financial risk and costs that are not reimbursable, this is clearly indicative of being outside IR35. Examples include buying assets/equipment/protective clothing needed for the assignment, investing in training in order to obtain the skills needed for this and future assignments, contributing to the PSC’s running costs and paying for other overheads such as materials.

Therefore the service scope should clearly indicate what equipment and materials the contractor is required to obtain and maintain directly, and what costs and/or expenses are reimbursable (or not).

You must ensure that the contractual terms your business agrees with a PSC (or that any recruitment agency you use for the supply of contractors agree with the PSC) allows recourse for poor performance by the contractor, and you must ensure that in reality contractors are held responsible for their acts and omissions. This includes putting right defective work (or work not completed in line with agreed milestones) in their own time and at their own cost, and making the PSC liable for negligence or damage caused by the contractor.

The contract should require the PSC to have appropriate insurances, and you should check that all PSCs engaged by your business carry insurances, particularly professional indemnity insurance.

Basis of Payment

Fixed price work is a good indicator of self-employment (being outside IR35). Where it is possible to agree a fixed sum for the delivery of services by the contractor against an agreed service scope, that should be the preferred route.

Where payment is made on the basis of time (hourly, daily or monthly), you should ensure that there is a fairly regular sign-off process in place to ensure the contractor is delivering against the agreed service scope and to establish that the services being delivered are of sufficient quality (and where they are not, the contractor should not be paid for the time taken to rectify any mistakes).

Another good reason for regular sign-off meetings (with evidence of them taking place and outcomes) is to show that the contractor is not subject to daily control and oversight by the engager.

Higher rates can sometimes indicate that an individual possesses specialist skills but earning a high rate does not automatically point to a contractor being outside IR35. If the work being done by the contractor is indeed unique to your business, or there are very few people doing that work in your business and they are all contractors on fixed assignment lengths and working on specific projects, it is the combination of the rate with the other influencing factors that indicates the assignment is outside IR35.

Contractors who operate outside IR35 should not be subject to (or even subject to the right of) control by the engager. Therefore, any contractors engaged by your business who are deemed outside IR35 should not be instructed how to carry out their services whilst on an assignment.

Contractors should already know their subject matter, and should not therefore engage in any induction or training (other than basic health & safety requirements) while undertaking an assignment. If the contractor requires further training to perform the tasks set out in service scope, the contractor should organise and pay for that training directly, and in his or her own time.

Control (and the lack thereof) should not be confused with monitoring progress, and regular sign-off meetings are important to check progress against the service scope and the quality of the services being delivered. Clear records of the sign-off meetings should be retained to show that the contractor is using his or her own initiative, skills and knowledge to deliver the services, providing such delivery is within the parameters of the service scope and of the quality that your business would expect / require of a professional in that field.

Where possible, engagers should allow contractors to determine their own working hours and working location unless the nature of the services being delivered dictate a specific working pattern or location (and even then, as much flexibility as possible should be afforded to the contractor). If you choose the working hours and location for your contractors, this points to control and is therefore an indicator that the contractor may be inside IR35.

As already stated, you should not request that any contractors perform tasks outside the service scope agreed. If contractors carry out ad hoc tasks without revising the terms of the engagement or setting up a new assignment, then this would be indicative of the assignment being inside IR35.

If your business is obliged to provide contractors with tasks or work to carry out on an ongoing basis, and if the contractor has an obligation to carry out that work, this shows that there is mutuality of obligation between the parties, which indicates that the relationship one of employment for tax purposes (and therefore inside IR35).

In order to show self-employment status, contractors should be engaged for a specific project / piece of work / assignment. Once the project has ended or been completed, there should be no contractual or actual right for either party to expect work to continue.

Mutuality of obligation has been found to exist where contractors have been required to work a fixed number of hours for a company, although where there is flexibility in when and how those hours can be worked this has been found to be of less relevance.

It is therefore essential that you agree the scope of the work that the contractor will be undertaking at the outset of assignment, and that no other duties or tasks are requested of, or performed by, the contractor during that assignment.

If further work comes up, you must make sure a new contract, with a new scope of services, is agreed and signed before the start.

And finally, ensure that your terms and conditions, and working arrangements, do not restrict contractors from carrying out work for other customers, though you can restrict them from supplying the same services to your competitors both during the assignment and for a defined period after the assignment ends.

The contract between your business and the PSC (or between a recruitment agency and PSC, if there is a recruiter in the chain) should not place any obligation on the contractor to provide his or her services personally. The agreement and any obligations and liabilities should be signed with the PSC alone (not with the contractor as an individual). It is possible to name the contractor as a representative of the PSC, but there should be no requirement that the contractor undertakes all the duties in the scope of service.

An arrangement (both contractually and in everyday practice) which allows the contractor to choose whether to do the job his or herself, sub-contract to others or send a substitute, is strong evidence that the assignment is one of self-employment and therefore outside IR35.

If contractors become integrated into your organisation this can be an indicator of being inside IR35. Factors that may be taken into account in rebutting whether contractors are part and parcel of the organisation are:

Entry, security or clearance passes that differentiate between employees and contractors;
A requirement to wear personal protection, uniforms or other clothing which distinguish contractors from employees;
Working patterns and hours dictated by the contractor and not the engager;
Working away from your premises and / or working in a separate area of the premises when onsite;
Exclusion from employee facilities, canteens, parking areas, company updates / presentations and social activities;
Exclusion from employee training (save where such training relates to health and safety or basic training on your company’s systems);
Exclusion from all types of employment benefits - sick pay, holiday pay, maternity/paternity pay, pension plan contributions;
Exclusion from the company’s disciplinary and grievance policies, and any involvement in disciplining or dealing with grievances of the engager’s employees;
Differentiation between employees and contractors in company policies and procedures – many policies will not apply to contractors at all and should clearly state so; other policies will encompass contractors as well, but there may be differences in the application and use of the policy (or the outcomes from a breach of the policy) for contractors and these should be clearly stated.

Working as part of a team that includes your employees does not mean contractors are inside IR35. It is reasonable that contractors may have to work as part of a larger project team on an assignment. Where this is the case, you should ensure that the contractor is the only person who has been engaged to undertake the work that he / she is carrying out. If other members of the team are doing the same work as contractors, it is important that these people are also contractors and not employees – this demonstrates that your own workforce do not hold the skills, knowledge or experience required to carry out the services that you are engaging contractors to perform.

If your business chooses to engage a PSC contractor who has previously been an employee, there will be an assumption that the contractor is inside IR35. This is because, on the face of it, it is easy to argue that the contractor is being treated by the business the same way now as it did when the contractor was an employee. In order to demonstrate that the contractor arrangement is one of true self-employment and outside IR35, there will need to have been a clear change to the individual’s working conditions and contractual arrangements to support the fact that they are no longer an employee but are now in business on their own account.

Self-employed contractors tend to work with multiple clients (sometimes simultaneously). This is another reason why it is important to let contractors dictate their own working times and locations – so that they can support multiple clients. Other indicators that a contractor is genuinely in business of their own account – and is therefore an indication that he or she is outside IR35 – is that he or she maintains a separate office space (such as a home office), actively promotes the PSC and its services, pays for appropriate memberships and subscriptions (without reimbursement), and pays for any training or continuing professional development (without reimbursement).

Contractors who are deemed outside IR35 should be subject to financial risk. That means they take the risk that an assignment is terminated early, or isn’t extended for some reason. There should also be no ongoing expectation by either party that when an assignment is completed there might be another one offered by the engager, or that the offer might be accepted by the contractor.

PSCs should be required to remedy any defects in their work or services at their own time and cost.

Don't Forget!

IR35 Pitfalls & Traps

If your business views contractors as an extension of its own workforce, then contractors are more likely to be controlled, integrated and required to perform services personally. All of these point to contractors being inside IR35.

Contractors should therefore be engaged for a specific reason and given the freedom to perform the agreed services how, when and where they choose. Each piece of work should be discrete, clearly scoped and agreed contractually before the engagement starts. If there is further work, make sure there are separate service scopes and contracts for each piece of additional work.