How to take the private sector IR35 reforms in your stride – Criteria 1: Personal Service

2019-09-03| Clare Allan

Do you know how you’re going to respond to the changes to IR35 that are coming in April 2020?

We speak to many clients who aren't clear on what these changes are or what they mean for their businesses.

Like our clients, you may be concerned about what it means for you and whether you will be able to continue to use contractors after April 2020.

The good news is that done properly you can still use contractors compliantly outside of IR35, you just need to make the necessary changes to ensure your business is set up to do so.

To help you with this we created a detailed guide which walks you through what the changes are and what you need to do to comply with them. You can download it here.

To make our guide even easier to absorb we’ve broken our key guidance in to a series of blogs which walk you through each of HMRC’s four key criteria for assessing IR35 compliance and what you need to do to ensure you can continue to use contractors as you do today.

Today’s blog is on the first key criteria – Personal Service.

What is Personal Service

It’s something that many in the private sector have given little thought to, but it’s a key criteria for HMRC when determining employment status.

Personal Service relates to whether a worker is seen as an employee or a self-employed contractor based on the service they offer.

  • An employee will operate under a contract of employment carrying out supervised activities. They have no option to substitute another person in to their role as control of their engagement lies with the firm.
  • An Independent Contractor enters into a contract to provide services to a business. They’re self-directing and if unavailable to work, they’ll be able to provide a substitute with the skills and experience required to undertake the work while they’re unavailable.

So, if the contractor could genuinely provide a substitute in the event of their unavailability and that substitute was…

  • Equally skilled
  • Qualified and
  • Ready to work

…the contractor would be deemed as acting outside of IR35, and you could continue to engage them as you do today.

What companies get wrong with Personal Service

While some firms have substitution clauses in their contracts already, we’ve spoken to many who have a watered-down clause that wouldn’t comply with the April 2020 changes.

For those firms who do have these clauses in place, the next common challenge is ensuring that their contractors can actually substitute if they needed to.

It’s easy for contractors to say that they have a network they could use to cover their absence, and as it stands most companies will just take their word for it.

While it isn’t a problem under the current regulations, this lack of proof will become a real issue for you post April.

What do you need to do to comply?

To prepare for April 2020 you should start by reviewing all of your contractors’ contracts and ensure that they have the right to substitute should they need to.

Next, verify that each of your contractors has the ability to substitute, even if they never actually need to. You’ll want to have a clear approach and process in place for documenting this should HMRC ever investigate your firm.

Finally, review and update your onboarding process to make sure you’re asking for, and documenting evidence of, their substitution capability before they join you.

Implementing these steps will help you show HMRC that your contractors are genuinely operating outside of IR35.

Once you’re watertight on this criteria, the second is all about Control, we’ll cover this in our next blog in the series.

If you want to get our full guide on what you need to do to ensure you are ready for the April 2020 IR35 changes then click here to download it today.