Reply to: limited company IR35 query

[malvolio]

Could you re-write that using shorter words so we can understand up here please?

Sigh...

1. If they ask you to deliver something in the best way you know how, you're not caught. .If they tell you what to do, you're caught.

2 If you're allowed to send a subbie, whether or not you actually do so, you're not caught. If they can refuse said subbie on any other grounds than a subjective assessment of the subbie's ability to do the job, you are caught.

3. If no work equals no pay, you're not caught. If you can be paid when there is no work to be done, you're caught.

A good advisor will defeat an IR35 challenge given any one of those three conditions. Go look up the Potted Guide to IR35

HTH

[northernladuk]

D&C and RoS are separate considerations (as is Mutuality but let's not get picky). The Security Clearance restrictions don't work as D&C since they apply equally to everyone, employee or contractor. Being told what to deliver isn't control, but being told how and/or when and/or where are unless there is a compelling business reason that doesn't also apply to the client's employees(which to date there hasn't been). As for RoS, the key is "Right"; if you have contractually valid and supportable RoS, no problem; rarely does that happen, though, the client usually demands too much say in the appointment of a subbie; not a problem for a driver or a coder, perhaps, but understandable in an expert or a senior bod.

But picking on detail points of law isn't the answer either; since Dragonfly you have to look at the totality, which makes it all very subjective and even more utterly unworkable that it was before.

Could you re-write that using shorter words so we can understand up here please?

[THEPUMA]

thanks. I've been looking into the limited company and I found it's also possible to set up a LLP. Right now LLP sounds better since it'll be a small company. What do you think?

A limited company usually has 3 potential tax advantages over an LLP. Firstly, your earnings will not be subject to NI if paid largely as dividends and assuming you are not caught by IR35. Secondly, if you have such a convenient thing as a spouse with a lower marginal rate of tax than you, you can take advantage of this by paying them a dividend. Thirdly, if your earnings are sufficiently high that you are unable to draw them within your and your spouse's basic rate allowances, you can choose to leave them undistributed in the company in order to defer or absolutely mitigate the tax.

Re the debate over IR35 between Craig and Lisa, I agree entirely with Craig and based upon what you have told us I think that it is highly unlikely that you would be caught by IR35.

Puma

[LisaContractorUmbrella]

OK, ok would it help if I said 'a determination' rather than 'the determination'

All I'm trying to say is that I cannot imagine a situation where you would have total client D & C but a RoS and be outside IR35 which is what Craig was arguing.

[administrator]

Hi cinek,

See how confusing IR35 is - even the experts can't agree

Can anyone give a straight answer to the OPs question?

Cheers,

Admin

[Craig@Clarity]

And I would argue that a right of substitution or not is a determination of control

Just to be clear and concise, if the contractor had full control over the methods of his/her work, then the contractor is not subject to IR35 or a deemed salary calculation. Same applies if he/she has the right to substitution or no mutuality of obligation, he/she is not subject to IR35.

Whether the contractor has the right to substitution or not have the right, it isn't directly link or exclusive to control IMHO. Let's say the contractor has the right to substitute; it is not necessarily true that the contractor then has control over the methods of their work. Equally, if the contractor does not have the right to substitute; it is not necessarily true that the contractor then has no control over the methods of their work and vice versa.

The way I read your comment is that if the contractor doesn't have the right to substitution, he/she doesn't have control over their methods of work. This is not true. Think of the scenario of where a contractor may work for the MOD or other high security environment where not any Tom, Dick or Harry can wander in. They may not have the right to substitution but in no way, does that determine the level of control the contractor has. In my opinion, the right to substitution and control are not exclusive to each other.

and I would certainly argue that a contractor can fail on all IR35 tests apart from ROS and still be outside. To use your quote: The driver was held to be self-employed because of this and the other factors inconsistent with a contract of service.

I agree with you here and that was kind of my point that the contractor can have no control over their methods of work yet still be outside of IR35 due to other factors. In my quoted case, the other factors, as you kindly highlight, was the contractor substituted.

[malvolio]

D&C and RoS are separate considerations (as is Mutuality but let's not get picky). The Security Clearance restrictions don't work as D&C since they apply equally to everyone, employee or contractor. Being told what to deliver isn't control, but being told how and/or when and/or where are unless there is a compelling business reason that doesn't also apply to the client's employees(which to date there hasn't been). As for RoS, the key is "Right"; if you have contractually valid and supportable RoS, no problem; rarely does that happen, though, the client usually demands too much say in the appointment of a subbie; not a problem for a driver or a coder, perhaps, but understandable in an expert or a senior bod.

But picking on detail points of law isn't the answer either; since Dragonfly you have to look at the totality, which makes it all very subjective and even more utterly unworkable that it was before.

[LisaContractorUmbrella]

From HMRC's website:

"This established that in order for there to be a contract of service there must be
• The worker has to be subject to a right of control. If there is no right of control of any kind then you will not have a contract of service. However, it was also made clear in the judgment that, although a right of control is an important factor in determining employment status, it is not necessarily a determining factor;
• Personal service must be given. However, the court did make the important point that a limited right of delegation was not inconsistent with a contract of service. This has been reaffirmed by later case law (see ESM7220); and
• the other factors present are consistent with a contract of service. Factors such as ownership of significant assets, financial risk and the opportunity to profit are not consistent with a contract of service.
http://www.hmrc.gov.uk/manuals/esmmanual/esm7030.htm"

From case law and probably one of the fundamental cases in IR35:

"Ready Mixed Concrete Ltd v. Minister of Pensions & NI [1968] - A lorry driver had to wear a uniform and was subject to a significant level of control. However the van driver did provide a substitute. The driver was held to be self-employed because of this and the other factors inconsistent with a contract of service.
http://www.amlinked.com/ir35.asp"

All I'm saying is that the determining factor for IR35 is not always control

And I would argue that a right of substitution or not is a determination of control and I would certainly argue that a contractor can fail on all IR35 tests apart from ROS and still be outside. To use your quote: The driver was held to be self-employed because of this and the other factors inconsistent with a contract of service.

[Craig@Clarity]

The determining factor will be the control that the company you are working for has over your working practises.

From HMRC's website:

"This established that in order for there to be a contract of service there must be
• The worker has to be subject to a right of control. If there is no right of control of any kind then you will not have a contract of service. However, it was also made clear in the judgment that, although a right of control is an important factor in determining employment status, it is not necessarily a determining factor;
• Personal service must be given. However, the court did make the important point that a limited right of delegation was not inconsistent with a contract of service. This has been reaffirmed by later case law (see ESM7220); and
• the other factors present are consistent with a contract of service. Factors such as ownership of significant assets, financial risk and the opportunity to profit are not consistent with a contract of service.
http://www.hmrc.gov.uk/manuals/esmmanual/esm7030.htm"

From case law and probably one of the fundamental cases in IR35:

"Ready Mixed Concrete Ltd v. Minister of Pensions & NI [1968] - A lorry driver had to wear a uniform and was subject to a significant level of control. However the van driver did provide a substitute. The driver was held to be self-employed because of this and the other factors inconsistent with a contract of service.
http://www.amlinked.com/ir35.asp"

All I'm saying is that the determining factor for IR35 is not always control

[cinek]

thanks. I've been looking into the limited company and I found it's also possible to set up a LLP. Right now LLP sounds better since it'll be a small company. What do you think?

[LisaContractorUmbrella]

There wouldn't be full control exercised by the contractor and the ROS would not be restricted.

The issue of control comes down to that excercised by the client and not by the contractor

[Craig@Clarity]

There wouldn't be full control exercised by the contractor and the ROS would not be restricted.

[LisaContractorUmbrella]

Sorry for splitting hairs but I would rather give a full answer. Also, dividends can be paid under IR35 in some cases from the 5% allowance from the deemed salary calculation.

WRT to control and ROS being fettered; if we took the example where I was hiring a temp from a recruitment agent for 6 months. The temp would be under full control but I wouldn't be restrictive over who the temp was that the recruitment agent sent (provided they have the necessary skills etc) so therefore IR35 wouldn't apply to the recruitment agent.

Another example would be where a contractor was working on a secured site and did not have full control over his/her methods due to the restrictive nature of the workplace, but was allowed to subcontract provided that the subcontractor had the same level of security clearance. In this example, there would not be full control and ROS would not be fettered.

1st example - the temp would be employed by the recruitment agency and therefore IR35 would be irrelevent.

2nd example - did you mean that there would be full control and ROS would not be fettered?

[Craig@Clarity]

Sorry for splitting hairs but I would rather give a full answer. Also, dividends can be paid under IR35 in some cases from the 5% allowance from the deemed salary calculation.

WRT to control and ROS being fettered; if we took the example where I was hiring a temp from a recruitment agent for 6 months. The temp would be under full control but I wouldn't be restrictive over who the temp was that the recruitment agent sent (provided they have the necessary skills etc) so therefore IR35 wouldn't apply to the recruitment agent.

Another example would be where a contractor was working on a secured site and did not have full control over his/her methods due to the restrictive nature of the workplace, but was allowed to subcontract provided that the subcontractor had the same level of security clearance. In this example, there would not be full control and ROS would not be fettered.

[LisaContractorUmbrella]

You can still pay dividends whilst subject to IR35 if there is a built up of reserves within the company from contracts that fall outside of IR35.

Control is not the only determining factor for IR35. You can be totally under the control of the end client but have the right to substitution/subcontract/reassign which would place you outside of IR35.

Tad hair-splitting on point 1


I am not sure I would agree Craig. If the client had total control I think it would follow that any ROS would be fettered