Contractors’ Questions: What legal rights and deductions are due on an inside IR35 contract?

Contractor’s Question: I am a contractor and have just been offered an inside IR35 contract. I’m fine with paying taxes as per PAYE and I will apparently be paying Employer NI, Employee NI and income tax. Is that correct, in that I’m legally obliged to pay all three?

What I’m also unclear on is the actual ‘Employment Contract.’ I am been asked to sign a contract that treats me as an employee. My question is; does an inside IR35 contract automatically mean I will qualify for employee conditions such as having certain days for holiday and less positively, defined working hours? When do I get such rights in return for all these extra tax payments I have to now make?  

Expert’s Answer: Due to the UK-wide outbreak of covid-19, times are hard right now – nowhere more so than on the NHS, which is why we’re donating 30% of our fees for work on coronavirus issues to the health service. In your case, it’s good to see work is still available.

The starting point for your enquiry is that presumably the contract is for a public authority. If not, the payer should not be making any deductions, as the rules proposed for April 6th 2020 (which were to require deductions for an ‘inside IR35’ contract) have been shelved until next year. For deductions of PAYE and NICs to be valid, there would have to be a basis for the hirer to pay over the deductions to HMRC, and there is no such legal basis. Payment of PAYE and NICs is pursuant to regulation, not a voluntary arrangement.

Where deductions do have a legal basis

The currently in-force IR35 rules for public authorities (effective since April 6th 2017) do require deductions to be made if the contract is deemed to be inside IR35. Those deductions are PAYE and Employee NICs which must be deducted by the ‘fee-payer’ (the agency, or hirer if you’re a direct hire) from your PSC’s gross company invoice (less qualifying incurred expenses and VAT).

The resulting net payment is paid to the PSC but is treated as a ‘deemed employment payment’, but this is only for tax purposes, not any other purpose. In the above scenario, it is illegal for the hirer to deduct the Employer NICs from the payment. Again, as mentioned above, there has to be a legal basis for a deduction from the deemed employment income. The public sector IR35 rules in Chapter 10 do not allow for employer NICs to be deducted and so there is no such basis.

Relationship breakdown?

Also, it is generally unlawful for an employer to deduct employer NICs from an employee’s pay. It could be that rather than a deduction, the hirer is reducing the headline pay rate by an amount equivalent to the employer NICs. This would not be a deduction but instead a different point -- the offer of a new rate for you to agree or reject, it should not be reduced without agreement. And of course if you don’t agree, there could be a breakdown in the relationship.

As the work has legally been done by and invoiced by the PSC, the net payment belongs to the PSC, but again is treated by HMRC as a free net payment in the hands of the individual, tax having already been paid. But because the money is never due or owing to the individual, the individual does not have employment rights as against the fee-payer. And a PSC cannot be an employee in law, so it has no rights either. The payment is ‘treated as’ an employment payment  but is not an ‘actual’ employment payment giving rise to rights.

An apology

It follows that employment conditions and entitlements as against the fee payer simply do not arise and just because the contract is 'caught' by the IR35 rules does not confer employment rights. Sorry not to be the bearer of better tidings.

The expert was Adrian Marlowe, managing director of Lawspeed, a legal advisory specialising in contractor law, IR35 and employment status.

Thursday 23rd Apr 2020
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Written by Adrian Marlowe

Adrian Marlowe is a recruitment industry specialist lawyer. Founder and MD of compliance and legal consultancy Lawspeed, chairman of the Association of Recruitment Consultancies (ARC) and founder and director of the recruitment standards accreditation organisation Standards in Recruitment.
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