It’s more than a year since new private sector off-payroll (IR35) reforms came into force, and uncertainty still reigns among businesses and contractors alike.
The reforms, implemented across the private sector in April 2021, have seen many businesses and individuals rethink their contracting policies and strategies and policies.
The real impact of IR35 on the contracting industry is becoming more apparent, with contractors changing the way they work and, for some, ongoing confusion about what the rules mean for them.
Here, we take a closer look at why working with an independent ICT consultant like AMDH can be considered as Outside IR35, and the benefits this can bring.
What is IR35, and why is it a concern?
IR35 is a piece of tax legislation introduced by HMRC to tackle tax avoidance by taxing off-payroll – or ‘disguised’ – employment at the same rate as regular employment.
It was designed to ensure that self-employed individuals, contractors or freelancers are taxed and treated the same as employees, regardless of whether they work through their own limited company or as employees of the end customer.
Off-payroll workers are those who carry out work for a business, with all the same responsibilities as a full-time employee, but don’t pay the same tax and National Insurance, and don’t receive the same benefits.
The new rules affect all public sector bodies, along with medium to large private sector companies that meet at least two of the following criteria:
- Annual turnover of at least £10.2m
- Balance sheet total of at least £5.1m
- 50 employees or more
Any businesses falling within the above criteria are now responsible for establishing the IR35 status of their contractors and deducting tax and National Insurance contributions for anyone falling Inside IR35. This can be done through internal accounting and payroll, or via an ‘umbrella company’. This is particularly relevant for recruitment agencies that provide workers but don’t have the internal capability to deal with tax or payroll.
What are the rules for small companies?
The rules differ slightly for small private sector companies, especially where small businesses are engaging contract workers through an intermediary such as a partnership, LLP or single-person limited company. In such instances, the responsibility for applying IR35 rules remains with the intermediary. The Companies Act 2006 defines what a small business is, as follows:
- Annual turnover not exceeding £10.2m
- Balance sheet total of no more than £5.1m
- Fewer than 50 employees for the company’s financial year
Where two or more of the above criteria are met in two consecutive financial years, the small business exemption applies and responsibility for applying IR35 rules remains with the intermediary.
Prior to the new rules being introduced, the contractor was responsible for determining whether the worker was an employee of the end customer or their own limited company.
The rule change has created a significant headache for hiring organisations and businesses – and for small business contractors too.
If the hiring organisation or intermediary wrongly assesses the contractor as working Outside IR35, they could be liable for the tax. So, there is an incentive from a risk perspective to deem all contractors inside IR35.
This, in turn, prevents micro-businesses from operating as businesses, as their staff on new work are taxed as employees of the client.
It causes problems for the contractor because although IR35 status is supposed to be determined on a case-by-case basis based on the appointed contractor, many jobs are now advertised stating up-front whether they are Inside IR35 or Outside IR35. This prevents contractors from applying for certain roles.
This may make sense in some instances. For example, if you appoint a temporary manager for a project who will be responsible for some of your staff, then this, by definition, is Inside IR35.
However, many roles where this is not the case are now being advertised as Inside IR35, denying the opportunity to apply for contractors who work Outside IR35.
How can you benefit from working with an ‘Outside IR35’ contractor – like AMDH?
Several measures define whether a contractor/employee of their own limited company should be deemed Inside IR35 or not, and while it may be appropriate in certain cases, working with an ‘Outside IR35’ contractor, such as AMDH, offers many benefits, including:
✔Control & direction
A key determinant of IR35 status revolves around the extent to which the end customer client controls or manages the contractor.
AMDH is an independent ICT consultancy, so we inevitably have to work with our clients to understand the requirement and make sure what we deliver matches the client’s needs. However, we don’t work under the management of our customers. Instead, we prefer to work with our customers to write and agree a scoping or requirements document that defines what we will deliver and when. We then work on a ‘outcomes’ basis, where each outcome or deliverable is associated with a price.
For each project, we anticipate a range of tasks to be delivered, and these will be individually or collectively related to a payment milestone. Some of the other benefits of this way of working include:
- Our staff work as a part of our customer’s team, but not under the supervision of customer staff members
- Our staff work the hours required by AMDH, not by the customer
- Since we are paid based on outcomes, we’re not paid for time off, training or sickness
✔Personal service & substitution
Another critical element of IR35 status relates to whether the contractor has provided a service or their personal presence. Service provision is deemed Outside IR35, but the provision of a specific person would be deemed Inside IR35.
For AMDH, as a micro-business providing consultancy services based on the experience and skills of its staff, this is quite challenging – after all, we only have a small team.
Our business thrives on the knowledge and expertise of our staff as much as any other consultancy. The only difference between AMDH and a larger ICT consultancy is we have fewer consultants. However, this means we can offer consultants with a set of skills and experience that can provide a service to you based on what they know and what skills they have, rather than a personal service based on who the person is.
Our contracts also include substitution clauses, and we have provided more than one resource in our previous contracts to ensure it’s the skills, expertise and service we deliver, not the person.
✔Mutuality of obligation
Mutuality of obligation exists where the contractor can expect more work to be provided to them, and the client can expect any work they provide to be delivered. In situations like this, the contractor is working Inside IR35.
AMDH has worked on several contracts over the years from a range of clients, some of which were renewed or extended. In every instance, a new set of outcomes was agreed between AMDH and the client.
Our contracts have identified explicitly that our clients are not obliged to offer additional work and that we’re not obliged to accept extra work offers. We’ve also declined work from existing clients on occasions where we didn’t believe it was within our capabilities at the time.
✔Provision of equipment
Under IR35, HMRC can argue that if a contractor uses equipment provided by the client, they’re acting as an employee and would, therefore, fall Inside IR35.
Clients can rest assured that AMDH staff have their own devices that we provide. However, we acknowledge that many public sector clients require us to use devices they provide to access their services and complete the work. This is generally for security reasons, so it is acceptable.
We also have a range of other equipment we use when providing consultancy services.
✔Financial risk
Where the risk sits for non-completion of the work can be an indicator of IR35 status.
At AMDH, we tend to create proposals for the work we complete that identify assumptions, issues, dependencies and risks. These help both sides understand the likely challenges with the work and what’s expected of each party. Usually, we try to balance the risk fairly between AMDH and our partner so that both sides are responsible for the problems they may cause.
On the very rare occasions that we complete work that isn’t to the client’s satisfaction, then we are responsible for redoing that work to meet the defined requirement from the customer.
✔Payment
The method and manner of payment both affect IR35 status. Being paid a monthly salary or an hourly rate can be an indicator of being Inside IR35.
Consultancy tends to be paid per day or based on achieving desired outcomes. We prefer payment to be outcome-based, as it shifts away from the status as an employee. In our opinion, it also works better for our customers as you don’t want to pay for us doing nothing for a day while waiting for you to take some action.
Why it pays to work with AMDH
Many businesses are afraid of IR35 because they’re worried that if they determine a contractor’s status as Outside IR35 and get it wrong, they may find themselves facing a hefty fine.
At AMDH, we can assure you that we’re definitely Outside IR35 for the following reasons:
- We’re a business in our own right
- We have our own office that we pay for monthly
- We are VAT registered
- We have a website that is updated regularly
- We have more than a single customer
- We have employed more than one staff member
- We have used sub-contractors
- We are members of the East Midlands Chamber of Commerce
- We are Microsoft and VMware partners
- We have professional indemnity insurance, public liability insurance and employee insurance
- We spend money on marketing and sales – both on social media and through various direct marketing channels
- We tender for work through various frameworks
As a specialist independent, Derby-based ICT consultancy, we partner with our clients and invest time in getting to know them and their needs. Once we’ve identified what you’re looking to achieve, we’ll create and implement a new technology strategy to improve your efficiency and performance.
We also offer a wide variety of other services, including cloud service design, cybersecurity solutions, and much more. These all come with the many benefits of working with an independent ICT consultant.
Please don’t hesitate to get in touch to learn more about our services and how we can help you achieve the digital outcomes you’re looking for while meeting your IR35 obligations. You can reach us at info@amdhservicesltd.com or on 01332 322 588.
