Vallum's 10 point plan for IR35

06 February 2020

By Ralph Watkins

Vallum's 10 point plan for IR35


There is a great deal of information available about IR35 from a large number of sources. This can be daunting for small and even medium sized businesses who don't have the time or resources to wade through a huge amount of material. Time and again the query has come from Vallum's contractors and clients: "'What, in simple terms, do I need to DO?'

Vallum have come up with a simple 10-point plan to try and answer this. This is not formal legal advice, but we believe it to be a good starting point:

Definition of Terms

 End User: The business to which the Contractor supplies their labour.

Contractor: The person or persons who supply labour to the End User

Fee Payer: The entity that pays the contractor(s). This may be the End User or an agency such as a Recruitment Company.

Engagement: The supply of labour from a Contractor to the End User.

1. Is the End User either a public company, or non-small private company that meets at least two of these citeria: Turns over less than £10.2 million per year, has a balance sheet of less than £5.1 million, has fewer than 50 employees.

No: Go to 3

Yes: The contractor's engagement is likley to be outside the scope of IR35. Though the contractor will pay PAYE and NIC as an employee of the Umbrella company.

2. Is the Contractor employed through an Umbrella company that is a) onshore b) deducts PAYE and NIC c) deducts employer's NIC d) operates under UK employment law e.g. does not engage in unlawful 'pay through loan schemes' that are still being offered by some umbrella companies?

No: Go to 2

Yes: The Contractor's engagement is likley to be outside the scope of IR35. Though the Contractor will pay PAYE and NIC as an employee of the Umbrella company.

3. Is the Contractor operating through a valid personal service company e.g. their own limited company or partnership?

Yes: Go to 4

No: The Engagement should not go ahead unless the Contractor creates or joins a valid personal services company.

4. Has the End User the Contractor will be conducting work for, prepared a Status Determination Summary (SDS) that meets the requirement of 'reasonable care' in its' preparation i.e. Prepared in relation to this one engagement rather than a blanket ruling by a business that 'all our contractors are outside the scope of IR35' (Note that a blanket staement from an End User that all Contractors are to be considered 'inside IR35' is perfectly permissable.)

Yes: Go to 5

No: The End User has 45 days to create an SDS, and should ideally have one in place before the Contractor starts work.

4. Does the SDS meet the requirement of 'reasonable care' in its'preparation. i.e. Prepared in relation to this one engagement rather than a blanket ruling by a business that 'all our contractors are outside the scope ofIR35'

Yes: Go to 5

No: The Engagement requires an SDS that meets the standard of reasonable care before it should proceed.

5. Does the SDS identify at least one of the following?

a) The SDS defines that the Contractor has a high degree of control in how the Engagement is performed e.g. they are judged on outputs alone

b) The Contractor’s role is not an integrated part of the End User’s business e.g. not a key part of the management structure

c) The Contractor is taking a financial risk, and/or paying their own insurance

d) There is no mutability of obligation (N.B. HMRC does not appear to consider this an important test)

e) The Contractor has a right of substitution (N.B. HMRC does not appear to consider this an important test)

Yes: Go to 6

No: The Contractor is likely to be considered inside IR35. They must either join an umbrella company or be taken on as an employee of End User or Free Payer for the Engagement to go ahead. In any case, they will be liable for PAYE and NIC and their employer will be liable for employer's NIC. This will usually mean a deduction in the contractor's take home of around 25%. in practice, this will either increase the cost of the Engagement, or the parties will decline to pursue the engagement altogether.

6. Does the SDS determine that the contractor is outside the scope of IR35?

Yes: Go to 7

No: The Contractor is likely to be considered inside IR35. They must either join an umbrella company or be taken on as an employee of End User or Free Payer for the Engagement to go ahead. In any case, they will be liable for PAYE and NIC and their employer will be liable for employer's NIC. This will usually mean a deduction in the contractor's take home of around 25%. in practice, this will either increase the cost of the Engagement, or the parties will decline to pursue the engagement altogether.

7. Has the SDS been communicated to all parties involved? The End User, the Contractor, The Fee Payer and any agents of any of those parties?

Yes: Go to 8

No: This is required. Liability for an incorrect IR35 determination can rest with the party in the 'chain' of communication that fails to pass on the relevant details to the next party in that 'chain'.

8.  Does the Contractor's agreement contain or reference a Statement of Work (SOW) that defines their supply of labour in terms consistent with their SDS and defines their role as outside of IR35?

Yes: Go to 9

No: This is good practice. In reality, most contractors will be well aware of this and will not take on an engagement if it means that they could be considered inside the scope of IR35.

9. Does the End User undertake that they will draft a new SDS and SOW if the contractor's contract is extended and/or changes considerably in scope?

Yes: Go to 10

No: The business should be aware that this is good practice in the case of longer running contractors, or ones involved in any engagement that shifts in scope and duties.

10. The Engagement is likely to fall outside of the scope of IR35

Proceed with the engagement

At Vallum, we are committed to working with our clients and contractors to provide a compliant and common-sense approach to IR35 that will deliver assurance and peace of mind. Contact us at vallum@vallum.co.uk to find out more

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