Your options following an audit
Once you’ve audited your contractors, you have a choice between four options:
Remain outside IR35
Nothing changes here: your genuine independent contractors stay outside IR35. If you’re
worried about the risk of making a wrong determination, consider insurance to cover it.
Pay as you earn (PAYE)
Reclassifying a contractor as a PAYE worker inside IR35 is an option, but they won’t be happy:
not only will they be liable for more tax, it’ll also make HMRC suspicious that their self-
assessment was fraudulent. You run the risk that the contractor will quit.
Also, if they’ve worked for you for two years or more continuously, they can claim security of
employment tenure, which is grounds for a claim of unfair dismissal. They might also try to claim
under Agency Worker regulations.
If a lot of your contractors will be inside IR35, you could offer them the services of an umbrella
company that will withhold necessary taxes but will also offer them PAYE benefits like a
pension, loyalty schemes, and healthcare.
Under the deemed model, the contractor is still a contractor and the director of their PSC, but is
“deemed” inside IR35 for this specific assignment, and their agency has to withhold the relevant
taxes. This may be helpful if a contractor works on several assignments with different statuses,
but is generally considered too complicated and risky to be a useful alternative to PAYE and
umbrella in the private sector.
Statement of Work (SOW)
A more viable solution, as long as the work can genuinely be done through deliverable and
milestone-based outcomes, an SOW makes the agency the “end user” instead of you, passing
the buck of IR35 decisions to the agency.
However, if the work doesn’t constitute a genuine service provision relationship, you could be
liable for unpaid tax and employer’s NICs on the basis that you didn’t take reasonable care over
the decision (since you didn’t make it at all). This puts you in a worse position than if you’d
made a decision with reasonable care and got it wrong. Fake SOWs are also likely to be early
targets for enforcement.
Even if it doesn’t cause you legal trouble, an SOW can be more administrative trouble than it’s
worth, as you need to manage, describe and measure all the deliverables properly, leading to
time and money costs.
Employed Consultancy is an increasingly popular model. If your contractor is willing to be
categorised as a permanent employee, they can be employed by a service provider to provide
their services to you, usually on the traditional basis of T&M (Time and Materials), and billed
either through timesheets or under an SOW agreement.
Since the contractor is employed by another company, this puts you at less risk (although still
not zero) and means you only pay for days worked. However, unlike a true SOW, it leaves you
with little accountability for the project, so it’s not a complete answer to IR35 – it’ll only be useful
in specific cases.