Twelve years ago IR35 was born to counter the perceived abuse of individuals collecting their P45s on the Friday yet turning up for work the following Monday and carrying on as nothing had changed, except for the fact that they were now operating through their own personal service company. As part of any IR35 review therefore HMRC will scrutinise the period leading up to the date a worker is taken on where the contractor:
In these circumstances the Revenue will want to question the former employer now turned engager as to why there was a change in the taxation/NICs treatment. They will ask who suggested the change and why. Whilst there could be a number of legitimate reasons as to why the two parties have changed their employment relationship, prima facie it can look suspicious from where HMRC are standing.
Employment status is not a matter of choice, although the contrary could be argued for certain trades and whilst both employer and employee might rub their hands in anticipation of the tax and NIC savings they will both make by altering the relationship to that of self-employment this must not be the sole motivation. The driver for change should be commercial with tax and NIC benefits being a consequence of such change. Whilst the intention of the two parties may be to sincerely create a self-employed relationship this will not be enough if only cosmetic differences have been made to the way they conduct business together.
Both parties should be able to demonstrate that there was some consultation process that took place before the ex-employee decided to take up an offer of work that warranted them forming their own limited company to undertake the services.
Having established a genuine motive for self-employment there must follow a genuine change in the working arrangements. Subtle differences will just not cut it. There must be clear blue water between life as an old employee and that of freelancer. The obvious starting point will be removal of all perks and benefits that the person enjoyed as a former employee, e.g. company car, private health insurance, pension, sickness pay etc. A contractor operating their own business will now be responsible for such provisions should they choose to make them.
It goes without saying that the freelancer should not simply be doing the same job they once performed as an employee. They will have specific skills which the end client will wish to retain, and all the better if those skills are unique, but it is important that these are applied in a different manner, e.g. a defined project.
The freelancer may have once been under the auspices of a manager but this must no longer be the case. Our contractor is now their own man/woman who has been engaged for their particular skill/expertise and their relationship with management should be one of liaison and not supervision.
A genuine right of substitution that has been agreed and understood by both parties from the outset will be a clear demonstration that 'times they are a changing'. Better still that the worker invokes their right of substitution (once should be sufficient) and pays the replacement to reinforce the fact that their old employer no longer requires their personal service. In the good old days the employer would never have permitted such an arrangement. Sub-contracting work to third parties and/or engaging assistance will also have the desired effect.
The old 9 to 5 routine should now be abandoned, unless it is the freelancer's choice to work such hours. The contractor is now master of their own destiny, although it may well be necessary to work within deadlines. Nevertheless they should be able to exercise some flexibility over the time spent doing the work.
Where the nature of the services lend themselves to be able to be carried out from the contractors premises then a material increase in home working will show more control being assumed by the worker.
In the past the employer would have provided all the 'tools of the trade' and any training requirements. These costs should now be borne by the contractor's personal service company. That once treasured office space has to go, although there will be circumstances where the engager will require the worker to use their equipment for security reasons and provide them with basic facilities when the contractor needs to be on the end client premises.
Former colleagues will now need to be informed and appreciate that our contractor is no longer 'one of the lads' but has now become an accessory to the end client's business rather than an integral part of it.
Although there is another layer of risk on top of the normal employment status tests by working for a past employer, if managed correctly and with significant and demonstrable changes to the working arrangements, then neither party should be dissuaded from taking the plunge.