A hirer's guide to engaging with contractors (what’s all this IR35 chat about?)
In my job, and with mounting momentum, I’ve witnessed over recent years, a growing number of professionals less and less inclined to slog out the 9-5, job for life, opting instead for the emerging, gig-based, flexible working lifestyle.
Businesses too continue to appreciate the financial and productivity benefits of hiring specialist skill-sets as and when they are needed.
Given the growth in this area it comes as little surprise that the UK government are now looking at ways to better harness the tax framework for specialist contractors.
If you are a hiring manager in the private sector who engages contractors you’ll no doubt be hearing a bit of ‘noise’ around ‘IR35’, ‘changing legislation’, ‘off-payroll working’, etc.
This article looks to simplify what’s actually happening and serve as a practical guide to help you navigate working with contractors moving forward.
So what’s changing?
In short, nothing major.
At the moment there are regulations that dictate whether or not individuals you engage with on an interim basis qualify to work ‘outside of IR35’ typically via their own Limited Company (and all the benefits that go with this), or whether they should be ‘inside of IR35’ and on a PAYE tax set up (the latter being more costly to your business as you’ll need to pay additional employers NI contributions).
What’s changing isn’t the spirit of the legislation itself but who is liable for paying monies owed to the treasury if there’s an incorrect assessment made regarding the status of an assignment. The liability is switching from the contractor (at present) to the hirer/agency (as of April 2020).
Does this mean I can’t use contractors anymore?
Absolutely not, but it does mean your business will likely want you to use contractors appropriately and engage with them in the proper manner.
Be mindful of the fact that the best contractors with the niche skill-sets you require from time to time will wish to engage with you ‘outside IR35’ so you need to ensure you have the mentality and frameworks in place in order to accommodate.
So what is the ‘proper manner’ for engaging with contractors ‘outside of IR35’?
This is the crux of the matter.
There are lots of articles and advice available on what qualifies an engagement as being ‘outside of IR35’. These can be quite laborious and taxing reads so I’ve looked to summarise the key points of interest from a hirer's perspective:
The work itself
Those working outside of IR35 should be working on a scope of work that’s of a deliverable nature rather than business as usual work that forms part of the fabric of your business and day to day operation.
Those aligned to projects or where you need to engage in a little outside specialist help to navigate certain milestones and bumps in the road are ideally placed to engage with you as contractors outside of IR35. For example, you may need short term assistance in managing a project, regulatory advice, accounting service, IT expertise, etc.)
The best way to think of contractors is to view them in the same light you would a tradesperson coming to carry out some work on your home. It's not someone you’ll always need but you’ll certainly need their help to get the job done if your DIY skills are not up to scratch.
If you are using contractors for work of a deliverable nature you’ll find it easy to tick this box.
This is where things are much improved these days. Agencies (or indeed your HR team) should be issuing contracts that reflect the outside IR35 nature of the engagement. It's likely your current contractors will all be on contracts that are watertight in this regard.
Assuming your contractors are engaged through reputable agencies they will all be able to tick this box as compliant. I myself am a self-proclaimed ‘geek’ when it comes to contracts and IR35!
The way you interact with contractors as a hirer
This is where we definitely need to see some change if the private sector wishes to continue to receive the financial benefits of working with contractors on assignments deemed to sit outside of IR35. It’s likely a good few engagements that sit within the private sector may fail to satisfy this criteria despite being compliant in other areas.
Up until now we have a perverse situation whereby you as a hirer probably never see the aforementioned contract and as such have very little idea of the ins’ and outs and nuances of engaging with contractors and your responsibilities that lie within.
I’ll look to summarise some of these responsibilities and put them into more practical laymen’s terms (apologies in advance as I may look to use the trades-person analogy again!)
‘The contractor has the ability to decide when, where and how they do the work and shouldn’t be performance or micro-managed’.
This one can be a bit tricky and is probably where the biggest shift in mindset is required by hirers.
To get your head around this one you need to remember the contractor is there to complete a scope of work and is a business in their own right. They are not to be performance or micro-managed in the same way as your staff.
You can however still set demands and ask questions of their work as the client. If the quality of their output is poor or they are running behind agreed milestones you have every right to ask them to pull their socks up or even terminate their assignment altogether. In addition, their work is likely to be insured meaning you are protected financially if mistakes are made.
Many clients I speak to have concerns about the contractors’ ability to keep their own hours, but this doesn’t necessarily mean they can completely come and go as they please. For example its perfectly acceptable to ask them to be in a certain place at a certain time if the work they are carrying out requires them to be on site (project meetings, catch ups, etc).
This is not a point to be ‘spooked’ by, it’s probably more to do with having an element of trust in your contractors to get the job done and it does work both ways, you will find the best contractors will sometime work around the clock to get the work done on time!
- Mutuality of Obligation
You are not under any obligation to provide work for a contractor, nor are they under any obligation to accept work from you. Assignments should have a target end date and not be an open-ended affair. Never agree an open-ended engagement with a contractor.
- Right of Substitution
Not many hirers are aware that if your nominated contractor is unable to provide the services personally they have the right to provide a substitute from their business.
HOWEVER, the substitute needs to have the skills and knowledge available to carry out the work. If they don’t you as the hirer has the right the refuse! For example, if your trades-person sent a trainee in their absence and they started drilling holes in your pipes or splattering paint everywhere you would clearly have the right to tell them to down tools and stop working.
I’d encourage hirers not to see the right to substitute as a bad thing. Think about it, it can be hard to find some of the niche skills you need to get the work done and essentially you're are ensuring your contractors company has continuity of service built into their agreement with you.
- Part & Parcel of the Organisation
‘The contractor stays independent from the hirer’s employees and can easily be identified as a contractor e.g. by a badge’.
This means you should avoid having contractors appearing on your organisational charts. The contractor is also responsible for providing their own tools, equipment and training at a financial cost to themselves (again you wouldn’t expect to provide a trades-person with all the tools to do a job for you!)
However, for many projects it may mean that the contractor requires access to the client's IT infrastructure (for security or project reasons) and if this is the case it is perfectly acceptable for the contractor to have access.
What are my options if I’m uncomfortable with engaging with contractors in this manner?
If you feel you are unable to change behaviours in order to satisfy the criteria I’ve mentioned above it doesn’t mean you can’t still engage with a contractor to meet your needs, it just means they are likely to fall inside the scope of IR35 and with this comes increased cost for both parties.
The agency (assuming they have the facility to do so) will be required to carry out payroll on your behalf. This includes an employer's NI contribution which bumps up the overall cost.
So what would you advise?
I’d advise my clients to do the following:
- 1. If you’ve yet to do so, change your mindset when it comes to interacting with contractors outside of IR35 and embrace the contractual benefits as outlined above
- 2. Ensure your dealing with agencies who know what they are doing, have robust contracts, insurance and appropriate payroll systems in place
- 3. Make sure you have a good independent assessment tool in place in order to determine an assignments IR35 status before you hire (there will be a few available as April 2020 approaches)
So what about my current contractor workforce?
I’ve read a lot of articles that advise carrying out an audit and reassessing each and every current contractor’s IR35 status, but to what end?
The majority of your current contractor population are probably already assumed to sit outside of IR35 consideration. It would be ill-advised to switch the IR35 status of an assignment simply because liability has changed. Imagine the signal that sends, admitting to a contractor that only now that the liability sits with you are you starting to take interest in how their assignment should be governed.
The easiest thing to do with your current contractor pool is to engage them in the manner they have always expected and indeed how you should be engaging with them already by the letter of their contract.
Despite some alarmist, knee-jerk reactions the reforms to off-payroll working don’t represent a reinvention of the wheel, rather they provide an opportunity for better processes and transparency to exists throughout the supply-chain when hiring contractors.
Yes, it will take a slight shift in mindset and behaviours from most hirers but ultimately those who are able to grasp this will find themselves able to attract best freelance talent.