IR35 and Off-Payroll Explained

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Contractors holiday pay ruling should make clients more supportive on IR35 status

Another step has been taken towards encouraging clients to ensure their contractors are outside IR35. This follows the recent Stringer v HM Revenue & Customs House of Lords ruling, which confirmed that contractors who pass certain tests might be able to make claims for holiday pay against their clients.

Some ‘permtractors’ could be in for quite large payouts, as claims. But of more significance for true contractors working through their own contractor limited companies, is the likelihood that clients will finally start taking IR35 as seriously as their contractors have to.

So, as this ruling comes hard on the heels of the Tilson case, the ball is firmly in the clients’ court to work hard to confirm the status of their contractors. This can only help contractors clarify their IR35 status should it be called into question by HMRC.

Lords’ ruling

“The Lord’s ruling means you can be self-employed yet still be a worker entitled to paid holiday,” explains Mark Taylor of Accountax Consulting, which first reported on the case. He says that some contractors could be in line to claim quite significant sums in holiday pay. “The ruling means their claims are no longer limited to the current annual leave year,” Taylor told ContractorCalculator.

This leaves the door open to ‘unlimited’ claims that could be considerable, as Taylor explains: “In the past, most firms would pay off the worker, as a year’s holiday pay – the previous maximum – cost less than an Employment Tribunal defence. However, with one past backdated holiday award, that in the Canada Life v Gray case, being in excess of £30,000, the financial impact on clients could be disastrous.”

But contractors considering any action to claim employment or workers rights of any kind should carefully consider their IR35 status, as HMRC is likely to ask uncomfortable questions of contractors who have claimed to work outside IR35 then going on to claim holiday pay.

Tests for ‘workers’, not employees

It is likely that only a very narrow band of contractors would be eligible for long-term holiday pay claims, as the contractor would have to be directly hired by the client as a sole trader or working through the agency PAYE payroll, and thus an agency worker.

“There are three key tests of being a worker, and these should be distinguished from the tests of employment,” explains Taylor. “Firstly, there has to be a contract in place. Secondly, the worker is personally required to work, and cannot supply a substitute. And thirdly, the worker cannot be in business, because if they are then they cannot be a worker.”

This means that limited company contractors would fail the test, because not only are they in business, but because there is also an intermediary, their company, between them and the client.

Umbrella company contractors should already have an employment contract with their umbrella company and are also unlikely to be able to benefit from the latest Lord’s ruling. However, the ruling means that some umbrella contractors might have claims for backdated holiday over many years against their umbrella company, if they have not received the proper payments.

Any end-user client hiring large numbers of sub-contractors should be reviewing their contracts already in place and any new contracts as a matter of urgency

Mark Taylor, Accountax Consulting

Greater pressure on clients

According to Taylor, the ruling will affect clients with large subcontracted and self-employed workforces. “We see the biggest impact will be on construction clients. But any end-user client hiring large numbers of sub-contractors should be reviewing their contracts already in place and any new contracts as a matter of urgency.”

So it seems that, following the recent Tilson and Stringer cases, limited company contractors working outside IR35 could have a strong new ally – their clients – when it comes to putting together evidence that contractors are outside IR35 and not ‘disguised employees’.

Published: 03 August 2009

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IR35 and Off-Payroll Explained