Minimising IR35 risks

Posted on

January 14, 2020

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The chancellor announced last week (Tuesday 7th January) that the changes to the off payroll tax (commonly known as IR35), extending the 2017 changes for the public sector to the private,  will go ahead in April.  

The review that they announced at the same time which “will determine if any further steps can be taken to ensure the smooth and successful implementation of the reforms”, is very unlikely to stop it happening.  This should come as no surprise because: 

  • The rules themselves are not changing in any significant way, “just” which organisation has the responsibility to assess whether a role is inside or outside IR35 
  • The changes were implemented in the Public Sector in 2017 and so most of the issues have been addressed, one way or another.  

As we saw in the Public Sector in 2017, there’s been a number of over-reactions with some large companies telling contractors to ‘go permanent or leave’ and as a result some commentators are saying that ‘contracting is finished’.  

The reality is that, with a few relatively straightforward changes, companies and their suppliers can continue to have the benefits of contractors providing expertise and workforce flexibility, while minimising delivery and financial risks.  

We know this because Fimatix continues to be a contractor based organisation with an extensive public sector client base and we lived through the adjustment in 2017.  We have now distilled our experience to be able help the private sector.  

The key to keeping contractors outside IR35, and HMRC’s focus in an investigation, is actual working practices during the engagement; the contracts involved are important but less so.  What we found is that Agile ways of working provide the basis for an ‘outside IR35’ assessment. Let’s look at a couple of examples. 

Focus on Outcomes (and outputs)

One of the key IR35 tests is control, i.e. does the client specify how the work has to be done or does the client specify the outcome (or output) they need and allow the contractor to use their expertise to decide how to deliver this outcome.  

Focusing on outcomes is core to Agile.  A person deciding how to deliver the outcome using their own skills and experience is the core of empowerment, another key Agile concept.  

So, if you have mature Agile practices then it is likely that your contractors are low risk of being in breach of the control criteria.  

Ongoing viability 

The second of the key IR35 tests is Mutuality of Obligation, i.e. is the client obliged to give the contractor work and is the contractor obliged to take it.  

The Agile practice of assessing ongoing viability i.e. the question “are we still delivering value to the users?” is key here.  In theory it should be asked at the end of every sprint, in practice it typically happens every 1-3 months. Also 3 months is the detailed planning horizon where a client and the contractor can be specific about what outcomes should be delivered.  

Both of these points mean that in an Agile delivery there are natural breakpoints where the contractor can say “I’ve delivered what you’ve asked me to” and the client can say “there’s no more work” i.e. there is no mutuality of obligation. 

Lack of Personal Service

For completeness, the third IR35 test is the lack of personal service i.e. can the individual be substituted.  For each individual role, the right to substitute is mainly a contractual issue as it happens infrequently but HMRC do like to see that substitution has happened in that client or consultancy to demonstrate that it is possible. 

Fimatix has made several substitutions since the 2017 changes and so we know where and when it is appropriate.  The link to Agile practices is more indirect but the focus on outcomes does help by enabling the contractor to engage “helpers”, e.g. someone to help a delivery manager with sprint reports, to show that their service is not personal to them as an individual.  

Mature Agile supports outside IR35 assessments

The examples above are very much summarised for readability and demonstrate the underling principles.  The reality is that each delivery and role does need to be looked at in their specific circumstances, however the key message is that mature Agile practices support “outside IR35” assessments.   

How can Fimatix help?

The examples above are very much summarised for readability and demonstrate the underling principles, however, because each delivery is different, we can’t provide a manual or training course on how to do this.

We are working with our private sector clients in a number of ways 

  • Reviewing their contracts with contractors (and sometimes their clients as well) to ensure that they support Agile ways of working.
  • Tailoring our core offering of training, coaching and consultancy to help them develop their Agile practices, focusing on defining outcomes at the most granular level possible. 
  • Providing contractors that have mature Agile skills and experience to ensure that the ways of working on the ground are outside IR35  
  • Working with QDOS, our insurance partner, to ensure that all members of the supply  chain are covered by their comprehensive IR35 insurance.

If you would like help to minimise the disruption to your deliveries from the IR35 changes in April, please get in touch with James Skudder or