Key Legislation for Our Contractors

IR35 Legislation

IR35 is Tax Legislation. From 2021 it is no longer the contractors’ responsibility to determine if they are in or out of scope. The aim of this change is to make sure all ‘disguised employees’ are paying the correct tax. A disguised employee is a contractor that works via their own Ltd company, however, they would be deemed an employee because of the way the company treats and interacts with them.

To summarise, IR35 (Off-Payroll Working Rules) determines whether a contactor should be classified as an employee for tax purposes.

Inside IR35: Contractors deemed inside IR35 must have tax and National Insurance deducted at source by the fee-payer (e.g., the end client or agency) via PAYE.
Outside IR35: Contractors operating outside IR35 are responsible for managing their own tax and National Insurance via their personal service company (PSC).
Status Determination: The end client is responsible for determining IR35. GOV.UK have released a tool to help clients determine in and out of scope: https://www.tax.service.gov.uk/check-employment-status-for-tax/about-you. Clearwater will assist clients and contractors in ensuring proper assessment and compliance.
Liability and Compliance: If an incorrect IR35 determination is made, liability for unpaid taxes may fall on the fee-payer. The feepayer is whoever pays the contractor – this could be the recruitment agency, the client themselves or an umbrella company.

In an Out-Of-Scope Contractors

In-Scope Contractors: Those subject to IR35 and required to have PAYE deductions. In-scope contractors will have set hours directed by clients, have a fixed location, use of company equipment, cannot substitute anyone in their place are subject to supervision, direction and control in how they carry out their duties.
Out-of-Scope Contractors: Legitimate independent contractors who meet HMRC’s criteria for operating outside IR35. Out-of-scope contractors will set their own hours, use their own equipment, have flexibility around location, can substitute an equally qualified contractor if needed through their limited company and are not subject to supervision, direction, or control in their day to day duties.

Associated Risks

There are risks for clients if they deem all their contractors in-scope:

Contractors will end up paying more tax than needed.
Contractors may hand their notice in causing significant implications to the client’s project.
The contractor may appeal the client’s decision.
Contractors may demand a fee increase to cover their new tax obligations.

Agency Workers Regulations (AWR)

The AWR (2010) grants agency workers certain rights based on their length of service with a client:

Day 1 Rights: Equal access to workplace facilities and job vacancies as permanent staff.
After 12 Weeks: Equal pay and working conditions as comparable permanent employees.
Exemptions: Limited company contractors operating outside IR35 and those engaged under business-to-business contracts are typically exempt from AWR.
Client and Agency Responsibilities: Clearwater will work with clients to ensure agency workers’ rights are upheld and will maintain transparent communication regarding obligations.

Regulations Opt-Out (Conduct Regulations 2003)

Contractors engaged through a limited company may choose to opt out of the Conduct of Employment Agencies and Employment Businesses Regulations 2003.

Voluntary Opt-In: The decision must be made before placement begins, agreed upon by both the contractor and their PSC.
Implications: Opting out means contractors waive certain protections, such as entitlement to written terms before assignment. However, it can offer more flexibility for independent contractors.
Company Process: Clearwater will ensure all contractors are informed of their right to opt out and document their decision appropriately.
Advantages of Opting-Out:

No increase in administration or forms to complete which could result in increased margins/costs.
Avoid potential delays in starting assignments.
Less statutory restriction on your ability to substitute or sub-contract.
It will assist in the demonstration that you operate outside IR35.
Increased marketability to clients and recruiters looking to reduce administration and place candidates quickly.
More attractive to umbrellas and limited companies as they avoid increased statutory requirement.

Disadvantages of Opting-Out:

No additional protection regarding potentially onerous contract terms (existing statutory protection remains).
No statutory entitlement to information regarding health and safety.
No minimal protection when required to work away from home.
No added protection regarding confidentiality (Data Protection Act still applies).

Compliance and Risk Management

Status Assessment: Regular reviews of IR35 compliance and contractual terms.
Client Collaboration: Supporting clients in meeting their legal obligations.
Documentation: Maintaining records of IR35 determinations, AWR entitlements, and optout agreements.
Training: Ensuring internal teams remain updated on legislative changes.

IR35 Legislation

To summarise, IR35 (Off-Payroll Working Rules) determines whether a contactor should be classified as an employee for tax purposes.

Inside IR35: Contractors deemed inside IR35 must have tax and National Insurance deducted at source by the fee-payer (e.g., the end client or agency) via PAYE.

Outside IR35: Contractors operating outside IR35 are responsible for managing their own tax and National Insurance via their personal service company (PSC).

Liability and Compliance: If an incorrect IR35 determination is made, liability for unpaid taxes may fall on the fee-payer. The feepayer is whoever pays the contractor – this could be the recruitment agency, the client themselves or an umbrella company.

In an Out-Of-Scope Contractors

Associated Risks

There are risks for clients if they deem all their contractors in-scope:

Contractors will end up paying more tax than needed.

Contractors may hand their notice in causing significant implications to the client’s project.

​

The contractor may appeal the client’s decision.

Contractors may demand a fee increase to cover their new tax obligations.

Agency Workers Regulations (AWR)

The AWR (2010) grants agency workers certain rights based on their length of service with a client:

Day 1 Rights: Equal access to workplace facilities and job vacancies as permanent staff.

After 12 Weeks: Equal pay and working conditions as comparable permanent employees.

Exemptions: Limited company contractors operating outside IR35 and those engaged under business-to-business contracts are typically exempt from AWR.

Client and Agency Responsibilities: Clearwater will work with clients to ensure agency workers’ rights are upheld and will maintain transparent communication regarding obligations.

Regulations Opt-Out (Conduct Regulations 2003)

Contractors engaged through a limited company may choose to opt out of the Conduct of Employment Agencies and Employment Businesses Regulations 2003.

Voluntary Opt-In: The decision must be made before placement begins, agreed upon by both the contractor and their PSC.

Implications: Opting out means contractors waive certain protections, such as entitlement to written terms before assignment. However, it can offer more flexibility for independent contractors.

Company Process: Clearwater will ensure all contractors are informed of their right to opt out and document their decision appropriately.

Advantages of Opting-Out:

No increase in administration or forms to complete which could result in increased margins/costs.

Avoid potential delays in starting assignments.

Less statutory restriction on your ability to substitute or sub-contract.

It will assist in the demonstration that you operate outside IR35.

Increased marketability to clients and recruiters looking to reduce administration and place candidates quickly.

More attractive to umbrellas and limited companies as they avoid increased statutory requirement.

Disadvantages of Opting-Out:

No additional protection regarding potentially onerous contract terms (existing statutory protection remains).

No statutory entitlement to information regarding health and safety.

No minimal protection when required to work away from home.

No added protection regarding confidentiality (Data Protection Act still applies).

Compliance and Risk Management

Status Assessment: Regular reviews of IR35 compliance and contractual terms.

Client Collaboration: Supporting clients in meeting their legal obligations.

Documentation: Maintaining records of IR35 determinations, AWR entitlements, and optout agreements.

Training: Ensuring internal teams remain updated on legislative changes.