Bridging the IR35 Gap: Understanding the Differences Between Contracts
June 28th, 2023
The implementation of the IR35 legislation in the United Kingdom has brought significant changes to the landscape of contract work, particularly for those operating through intermediaries such as personal service companies (PSCs).
IR35 aims to tackle tax avoidance by determining the employment status of individuals providing services to clients, and one crucial aspect of the legislation is the concept of “gaps” between contracts.
In this article, we will discuss what IR35 is and its implications in contracts with employees, what the issue is when it comes to gaps between contracts and what you should pay attention to when changing hiring practices.
IR35 is a tax legislation introduced to combat tax avoidance by individuals who provide services to clients through an intermediary. The purpose of IR35 is to determine whether a worker is truly self-employed or should be considered an employee of a company for tax purposes.
The legislation is specifically targeted at individuals who work like employees but use intermediaries to reduce their tax liabilities. Under IR35, these people should follow similar rules as other employees and pay the appropriate taxes and contributions.
A worker is considered an employee if they were engaged directly by the client. Under IR35, these employees are subject to income tax taxation. On the other hand, if a worker is genuinely self-employed and responsible for their own tax arrangements, they will be deemed to be “outside IR35”.
The worker’s status under IR35 depends on the level of control the client has over the worker, the worker’s ability to provide a substitute, and the presence of other factors that might indicate an employment relationship. You can learn more about what the HMRC considers off-payroll working here.
The issue with gaps between contracts under IR35
In the context of IR35, gaps refer to the periods of time during which a contractor does not have an active contract or engagement with a client. In these intervals, contractors are not providing services or generating income.
Gaps can be relevant as they may impact the assessment of employment status. If they are frequent or significant, they can raise questions about the nature of the engagement.
Contractors should aim to manage their contracts and engagements in a way that minimises gaps, demonstrating a genuine business-to-business relationship.
Can a two-week gap beat IR35?
A two-week gap between contracts does not automatically determine whether a worker falls inside or outside IR35. Assessments consider a variety of factors beyond just the duration of gaps between contracts.
While there is no definitive checklist for what HMRC assesses, the institution will evaluate multiple factors, such as the level of control exercised by the client over the worker, if the worker has the freedom to send a substitute to perform the work, whether there is an ongoing obligation for the client to provide work and for the worker to accept it, and the extent to which the worker bears financial risks.
The HMRC will also evaluate if the worker is integrated into the client’s organisation or operates independently if there is control over the worker’s working hours, exclusivity to one client, and provision of equipment.
To ensure that your company is compliant with UK tax laws, consult with a specialised company, which will be able to advise you on contracts with individuals or other companies.
How to avoid long gaps between contracts?
Avoiding gaps between contracts can be challenging, as it depends on various factors such as market conditions, client demand, and your specific industry.
In the context of IR35, it is important that both employers and employees pay attention to these gaps and work to maintain a continuous flow of work while navigating IR35 regulations.
1. Plan ahead
As a contract approaches its end, be proactive and start searching for new opportunities. Actively engage in networking, reach out to potential clients, and keep an eye on job boards or freelance platforms to identify upcoming projects.
2. Expand your network
Networking is crucial for finding new opportunities. Attend industry events, join professional associations, and participate in online communities. Building strong relationships with colleagues, clients, and industry contacts can lead to future work referrals and opportunities.
3. Maintain a strong online presence
Create a professional online profile on platforms like LinkedIn and keep it updated with your skills, experience, and availability. Actively engage with relevant industry groups, share your expertise through posts or articles, and leverage social media platforms to showcase your work and attract potential clients.
4. Diversify your client base
Relying on a single client or a limited number of clients increases the risk of facing gaps between contracts. Try to work with multiple clients simultaneously or rotate among different clients to ensure a more stable income stream.
5. Build relationships with recruitment agencies
Establish connections with recruitment agencies that specialise in your industry. They often have access to a wide range of contract opportunities and can actively search for suitable roles on your behalf. Stay in touch with them regularly to stay informed about new openings.
6. Consider short-term or interim assignments
While looking for long-term contracts, be open to short-term or interim assignments. These opportunities can help bridge gaps between contracts, maintain cash flow, and expand your network. They may also lead to long-term contracts with the same client or referrals to other potential clients.
7. Enhance your skills and qualifications
Continuously update and expand your skills to make yourself more marketable. Acquire relevant certifications, attend training programs, and stay up to date with industry trends. A diverse and up-to-date skill set increases your chances of securing new contracts.
8. Stay informed about industry trends
Keep yourself informed about market conditions, emerging technologies, and changes in demand within your industry. By staying ahead of industry trends, you can position yourself to take advantage of new opportunities as they arise.
9. Seek professional advice
IR35 legislation can be complex, and seeking advice from employment law specialists or tax professionals can help you understand and navigate the regulations effectively. They can assist in structuring your contracts and working arrangements in compliance with IR35 requirements.
Remember, while you can take steps to minimise gaps, external factors may still impact the availability of contracts. Flexibility, adaptability, and a proactive approach will be essential in managing your contract work and navigating IR35 regulations.
Seeking expert advice is essential when dealing with complex tax legislation such as IR35. The HMRC will assess a variety of factors to determine if an individual falls under IR35, going beyond the length of gaps in contracts.
When working through an intermediary company, contractors must be aware that frequent or extended gaps between contracts can potentially affect the HMRC assessment and increase the risk of falling inside IR35.
Effective contract management, open communication with clients and specialised advice will help contractors deal with the nuances of the legislation better.