Research published this week has shown that 89% of IR35 contractors want greater employment rights, such as sick and holiday pay and benefits. Chris Brazier, senior associate in the employment law team, answers key questions around the issue.

Given that those operating under IR35 usually do so through personal service companies (PSCs), what would the implications of giving them employment rights be?

The benefit of working through a PSC is that individuals pay themselves in dividends. In return, they do not pay income tax and employee national insurance contributions. The IR35 rules prevent that from happening by requiring the intermediary make the “income” subject to tax and NIC.  In these circumstances, much of the benefit of operating through a PSC is lost to the individual, with none of the protection that employees and workers enjoy. As such, the results of the survey are unsurprising.

However, from an employer’s perspective, the “contractor” is not included in headcount and the they do not need to be concerned about employment status.

Accordingly, if individuals were given employment (or more likely worker) rights, one of the main incentives for engaging individuals through PSC’s (even those caught by IR35) would be lost to employers.

What should employers do to avoid the issues and pitfalls of getting caught by IR35 rules?

There has been a significant clamping down on the benefits of those individuals who are caught by the notoriously difficult to interpret and complex IR35 rules. As such, employers should ensure that their contractual documentation and the relationship that sits behind that contract with any PSC is regularly reviewed and assessed.

Whilst contractual documentation should reflect the reality (and HMRC have and will look behind contractual documents to see what the reality is) employers who have carefully  drafted documents that reflect the following will be assisting themselves should HMRC begin an investigation.

  • include a right of substitution – the wider the right, the better;
  • there should be no obligation to accept and no requirement to provide work;
  • the employer/company should have as little control as possible over the PSC;
  • the contract (or if possible, the “project”) should have defined end dates;
  • the individual engaged by the PSC should not be integrated into the employer/company.

If employers actively follow these contractual principles, they will be significantly reducing the risk of an investigation by HMRC. The trade-off is that the employer will have less control over the work of their contractors and, if they cannot sacrifice that control, alternative options should be considered.

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