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IR35 & EEA Opt Out Rules

Background

Red Snapper Recruitment has always taken a highly compliant approach to the contractual and pay arrangements of our agency workers.   This guide sets out two important and sometimes complex areas IR35 and the Conduct of Employment Agencies legislation. 

The purpose of the guide is to ensure all agency workers subject to our policies have a good understanding of the rationale behind them as well as the source government legislation and guidance.

If an agency worker chooses to work via a limited company, it is very important that they pay the correct amount of tax.

It is important agency workers who choose be paid via their own limited company have sought expert opinion on this matter.

There is no question about the legitimacy of working via a limited company.  Many agency workers use these vehicles to manage multiple income streams, expense arrangements other employees or directors/ shareholders such as family members.  Each income stream should be considered separately for tax purposes.  Income received for your work as an agency worker can be taxed differently to other income received from other works e.g. consultancy or investigative work for other clients.

A key area of concern an agency worker working through a limited company is whether or not to report your fees as in or outside the scope of the HMRC’s IR35 rules.  In order to work compliantly within these regulations, you need to ask yourself, if the limited company structure and the agency relationship were taken away, would the relationship that exist between the organisation for which  you are working resembles that of service, i.e. employment.

It is vital that when assessing this relationship that you do not focus solely on the physical contract issued.  When HMRC conduct their audits, you will be asked a series of questions about the situation in which you work.  The contract will be requested and reviewed by HMRC but they will also ‘stand back’ and examine the facts of your working relationship.  

Set out below is an extract from the HMRC guidance note on the law stating the areas that will be examined.

The Right to get a Substitute or Helper to do the job:

Personal Service is an essential element of a contract of employment.  A person who has the freedom to choose whether to do the job himself or hire somebody else to do it for him, or who can hire someone else to provide substantial help, is probably self-employed.

Provision of Equipment:

An employer generally provides whatever equipment is needed to do the job (though in many trades, such as carpentry, it is common for employees, as well as self-employed workers, to provide their own hand tools).  Provision by the engager of the major items of equipment and/or the materials necessary to do the job will point towards employment.

Basis of Payment:

Employees tend to be paid a fixed wage or salary by the week or month and often qualify for additional payments such as overtime, long service bonus or profit share.  Independent workers, on the other hand, tend to be paid a fixed sum for a particular job.  Payment “by the piece” (where the worker is paid according to the amount of work actually done), an hourly or day rate can be a feature of both employment and self-employment.

Financial Risk:

An individual who risks his own money by, for example, buying assets and bearing their running costs or paying for overheads and large quantities of materials, is almost certainly self-employed.  Financial risk could also take the form of quoting a fixed price for a job, with the consequent risk of bearing the additional costs if the job overruns.  However, this would not necessary mean that the worker is self-employed unless there is a real risk of significant financial loss.

Opportunity to Profit from Sound Management:

A person whose profit or loss depends on his capacity to reduce overheads and organise his work effectively may well be self-employed.  People who are paid by the job will often be in this position.

Employee Benefits:

Employees are often entitled to sick pay, holiday pay, pensions, expenses and so on.  However, the absence of those features does not necessarily mean that the worker is self-employed, especially in the case of short-term engagements.

Control:

It is a feature of employment that the engager has the right to tell the worker what to do or where, when and how it is to be done.  The extent of control may vary from one case to another - an engager will probably exercise more control over an unskilled worker than over a skilled craftsman.  However, a working relationship which involves no control at all is unlikely to be an employment

Right of Dismissal:

A right to terminate an engagement by giving notice of a specified length is a common feature of employment.  It is less common in a contract for services, which usually ends only on completion of the task, or if the terms of the contract are breached.

Length of Engagement:

Long periods working for one contractor may be typical of an employment but are not conclusive.  It is still necessary to consider all the terms and conditions of each engagement.  Regular working for the same engager may indicate that there is a single and continuing contract of employment.

Personal Factors:

In deciding a person’s employment status it may sometimes be necessary to take into account factors which are personal to the worker and which have little to do with the terms of the particular engagement being considered.  For example, if a skilled craftsman works for a number of engagers throughout the year and has a business-like approach to obtaining his engagements (perhaps involving expenditure on office accommodation, office equipment, etc) this will point towards self-employment.  Personal factors will usually carry less weight in the case of an unskilled worker, where other factors such as the high level of control exercised by the engager is likely to be conclusive of employment.

Intention of the Parties:

It is the reality of the relationship that matters.  It is not enough to call a person “self-employed” if all the terms and conditions of the engagement point towards employment.  However, if other factors are equally balanced, the intention of the parties will then be the decisive factor in deciding employment status

Approach to be adopted:

Given the list of factors mentioned above, it is tempting to try to determine a person’s employment status by adding up the number of factors pointing towards employment and comparing that result with the number pointing towards self-employment.  The Courts have specifically rejected that approach.

Conclusion:

In order to decide whether a person carries on a business on his/her own account it is necessary to consider many different aspects of that person’s work activity.

It is a matter of evaluation of the overall effect, which is not necessarily the same as the sum total of all the individual details.  Not all details are of equal weight or importance in any given situation.  The details may also vary in importance from one situation to another.

When the detailed facts have been established, this is when you stand back and look at the picture as a whole, to see if the overall effect is that of a person in business on his own account or of a person working as an employee in somebody else’s business.  If the evidence is evenly balanced the intention of the parties may then decide the issue.  As well as ensuring that both engagers and workers comply with the obligations placed upon them, HMRC will help in anyway it can to enable them to do so.

HMRC provide a free advice service where they will assess your contract and your position.  This is unconnected to the HMRC compliance departments and will not trigger an investigation into your returns.  This service can be found at http://www.hmrc.gov.uk/ir35/assistance.htm.

Opting out of the Conduct of employment agencies 2003 Act

This act was bought in to protect the rights of agency workers; opting out removes this protection which includes a number of clauses regarding the payment of your fees.  Our advice is that it is unwise to forego these rights but if you do make sure you understand exactly what you are giving up.  The governments briefing note can be found at:

Being opted out of the act will not alone strengthen a claim to be outside of IR35 as it is the facts as a whole that are considered. You should be wary of advice which suggests that it does.

The following statement is from the REC (the governing body of the Recruitment Industry).

‘Genuinely self-employed:

LCCs typically choose to opt out because they wish to demonstrate that they are genuinely self-employed. An individual’s self-employment status is determined by whether they are inside or outside of the IR35 tax legislation, opting out of the Conduct Regulations will therefore have little impact on whether an individual is genuinely self-employed under IR35. There are a number of factors which are assessed in order to determine whether an LCC is genuinely self-employed. These factors include an assessment of:

· the contractual relationship between parties;

· the level of control a client maintains over the LCC during the assignment;

· whether there is any financial risk taken by the LCC in providing its services (for example whether the LCC pays for their own professional indemnity insurance);

· whether there is a right of substitution in the contract that can actually be invoked; and

· whether the LCC provides their own tools or uses tools provided by the client,

Ultimately whether an LCC decides to opt out of the Conduct Regulations is entirely a decision for them to make, LCCs may wish to get their own tax and legal advice before making this decision.’

Our accreditations:

REC Reg No - 2009/541
ISO Accreditation
Certificate Number 11960
ISO 9001:2008