If you’ve been following developments in the contracting world, you’ll be more than familiar with the IR35 reforms to the private sector. It’s also likely you’ll have encountered the term “disguised employment”. But what exactly does it mean? How could it affect you? Read on as we discuss everything you need to know about disguised employment, how it relates to IR35, and the consequences of operating as a disguised employee.
What is an employee?
An employee is somebody who is typically provided with a contract of employment, giving them eligibility for a range of benefits, employment rights and protections.
Employees are eligible for the following benefits, such as:
- Retirement planning, usually in the form of a pension
- Paid holiday allowance, with a minimum of 5.6 weeks per year
- Additional paid time away from work, such as sick and parental leave
How does disguised employment differ from employment?
A disguised employee is a contractor whose limited company is engaged on a contract for services, however the contractor is being treated as though they are an employee of the company.
This can be attractive to employers as they will make significant savings, due to the absence of Employer’s National Insurance contributions. They also don’t have to offer employee benefits and rights, such as holiday pay, parental leave and sick pay.
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How does this relate to IR35?
If there is any ambiguity around whether a contractor is a disguised employee, there are three main tests of employment that can be carried out. These fall under the following categories:
This is one of the most important tests to determine disguised employment. A contractor can agree to completing tasks at an agreed time and place, but the level of control can be the determining factor.
Control can be present in the following forms, but is not limited to the following:
- Regular monitoring of the progress of work by the client
- Location for the services to be carried out from
- Provision of set working hours, a true contractor would arrange their hours to suit the task and fit around their existing schedule
- The client should not give you instructions on how you undertake the work you carry out
Right of substitution
The right to substitution is the contractor’s right to provide a substitute to complete the work should they be unavailable.
As the engagement is with a limited company it should be possible to send replacement or substitute to complete the work. If they were an employee, they would be personally responsible for completing the work.
Mutuality of Obligation (MOO)
Mutuality of Obligation (MOO) is another test used to determine whether a contractor is a disguised employee.
It considers the relationship between the contractor and the client they are working for, to see if their relationship resembles that of an employee-employer relationship. An employee-employer style of relationship would exist where a company is obliged to provide work, and the contractor is obliged to accept and complete this work.
A genuine contractor would never work under this basis. They receive payment for completing a project, and when this project is fully completed the contract naturally comes to an end.
What happens if a contractor is found to be a disguised employee?
If any of the above is apparent in a contract, the contractor could be viewed as working as a disguised employee, and so the contract may be regarded as inside IR35.
If the contract is found to fall inside IR35, the income received from that assignment will be treated as employment income. This means that it will be subject to PAYE tax and National Insurance deductions.
It is important that this is accounted for correctly as in an investigation, HMRC has the authority to assess tax liability for four years, and six years for National Insurance contributions. The financial cost to the contractor will typically be the total of any additional tax and National Insurance contributions which are payable on the deemed salary. If HMRC decide that the contractor has made a conscious effort to avoid paying, then it could end up costing a lot more.
We would recommend contractors to get each contract reviewed to determine the IR35 status.
If you would like to discuss how an IR35 review could benefit you, get in touch with us by calling 01442 353 464.
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