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:
- Workplace 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 end client.
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.
How do I know if I’m a disguised employee?
There are three main tests of employment status that must be considered.
These fall under the following categories:
This is one of the most important tests to determine disguised employment. The control exercised by the end hirer over you should fall short of what would be expected in an employment relationship. Consider who decides how, where and when you complete the work.
- Reporting into a manager or supervisor
- Specifying the location for the services to be carried out from, without good reason
- 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
Substitution / Personal Service
As the engagement is with a limited company it should be possible for that company to send a suitably qualified replacement or substitute to complete the work. Personal service is a hallmark of employment, if the end hirer is engaging you personally rather than your business this will suggest an employment relationship.
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. In an employment relationship a company is obliged to provide work, and the worker is obliged to accept and complete this work.
To maintain a position outside IR35, you should avoid this. Look out for contracts based on time and extended notice periods, which suggests a provision of work for a fixed length of time. Ideally an independent business should receive payment for completing a project or assignment, and when this project is fully completed the contract naturally comes to an end.
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What happens if a contractor is found to be in disguised employment?
It is important to remember that determining IR35 status is not a tick box exercise. It is possible for an assignment that requires personal service to be outside IR35 for example. You must look at the relationship as a whole.
If the contract and working practices are 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. They can go back further if you failed to take reasonable care.
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 decides that the contractor has made a conscious effort to avoid paying, then it could end up costing a lot more.
Top tips to show you're not in disguised or hidden employment
Show that you’re different
The easiest way to distinguish that you’re different from your client’s employees is to show it. Think about what freedoms you can exercise as a contractor and put these into practice. Some easy examples could be for you to regularly change up your work schedule, work from home when you can, agree your substitution process and project deliverables in writing.
Provide your own equipment
Contractors who buy and use their own tools for work could use this as a way to distinguish themselves from a company’s permanent employees. One of the tests that the government will generally conduct when reviewing your contract is ‘provision of equipment’ so committing to provide your own tools for the job may stand you in good stead.
Think about your contract length
If you’ve signed up for a long-term contract or one with an ambiguous end date, this could indicate an employment relationship. As a rule of thumb, project-based contracts are better than fixed time assignments.
Invest in your company
A company which is making regular investments, taking steps to expand and taking on financial risk is generally a good indicator of being in business on your own account. If appropriate, take opportunities to expand where you can, including hiring employees and investing in equipment. For instance, a virtual office or premises for your business could work well and help you to win bigger contracts.
Your next steps
We would recommend contractors to get each contract reviewed to determine the IR35 status. Even where this is not your legal responsibility, it is useful if you wish to dispute the determination through the client led disagreement process.
Our IR35 reviews cost £150 plus VAT for clients, and £180 plus VAT for non-clients; we also have the option for our current clients to upgrade to unlimited reviews, as part of our Elite package.
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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