How to operate Outside of IR35: working with contractors while staying compliant

Learn how to work with contractors and stay compliant without limiting your talent pool

June 19, 2024

Does your company treat all independent contractors as umbrella employees because of IR35? Whether a worker is “Inside” or “Outside” IR35 can be a very grey area. Being inside IR35 means that HMRC sees your worker as an employee and being outside IR35 means that the worker can continue to be paid and treated as an independent contractor. Outside IR35 reduces your costs and other obligations that come from working with an employee. 

But with the government-provided tool CEST proving to be so unreliable, many companies just don’t know how to stay outside IR35 and stay compliant. Some companies are creating blanket policies and treating their contractors as fixed-term employees because they’re so scared of the hefty fines and penalties that can come from getting IR35 determinations wrong. 

Doing this is not ideal for anyone involved. It forces contractors to be inside IR35 — when they may not want to be — with some raising their rates to make up for being taxed the same as full-time workers. It forces companies to limit their talent pools because they either can’t work with outside IR35 contractors or have to pay higher rates for them to accommodate for the rising rates. 

This makes it harder for companies to be competitive in the war for talent right now, at a time when it’s already incredibly challenging to hire the talent they need. Let’s look at the reasons why companies are putting these blanket policies in place, and what you can do to continue working with independent contractors — outside IR35. 

The fears around defining contractors as Outside IR35

The risk of steep penalties is just too high.

The penalties for getting IR35 determination wrong can be extremely steep. And with the HMRC’s moratorium on IR35 having ended so recently, companies are feeling the pressure to make sure all their ducks are in order. Depending on how many independent contractors a company works with, the fines can be extremely large. Many companies are saying that all workers need to be taxed as full-time employees, just to eliminate the risk of getting it wrong or needing to decide on a case-by-case basis at all. 

Showing reasonable care — even if they are confident about their worker determinations — is too big of a task

Showing reasonable care for each IR35 determination is extremely time-consuming. Ensuring this was documented for each individual contractor and keeping track of all of this information would usually require multiple full-time hires just to handle all of that. 

You might be confident that your workers will fall outside of IR35, but being confident that you have the paperwork trail for each worker that evidences reasonable care is another matter entirely. Sometimes it might feel like it’s not even worth it if you need to keep track of that trail manually or have someone in charge of verifying it exists for each worker. 

How to stay outside IR35: Asking the right questions to accurately classify a worker

There are a number of different questions that help you determine worker classification. No one specific question or answer will determine your worker as outside of IR35, but when you add them together, and they lean towards independent contractors, that helps support the reasonable care you must take. And reasonable care will be one of the biggest things HMRC consider during an audit. 

Adding in a scope of work around the time frame the contractor will work for you — or the limited nature of the project they’re taking on — can go a long way in helping you back your case that this worker should be treated as an independent contractor. 

There are other questions that can help you make your determination as well. If there is no work available, are you obligated to continue paying the contractor or find them additional work? Would the contract continue if the scope of services completed earlier than expected? If the answer was no to both, that also supports them being considered outside IR35. 

The biggest thing is that you have an audit trail in place to evidence the process you conducted for each worker. Doing this manually and in-house is incredibly cumbersome and negates any cost savings you make by engaging outside IR35 contractors. 

Worksome to help you classify workers, have an automatic paper trail, and minimize IR35 risk

Worksome Classify takes both the worker and their client through each question, to better ensure the unique status determination statement represents what is actually happening in real life. And since Worksome does your determinations all in one tool — instead of outsourcing to a third party platform — it automatically creates the much-needed paper trail. Just by using the tool you’ve automatically shown reasonable care. And with Worksome indemnifying each status determination statement we have done all we can to remove the risk for you.

Worksome helps UK companies be more competitive in the global war for talent. It gives you a full overview of your freelance management, not just your IR35 liability like some solution providers. And because it automatically creates a new determination every time a contract is extended, it continually helps you avoid further risk. 

If you want to keep working with independent contractors and are wondering how to stay outside IR35 rules and remain compliant, request a personalized demo to learn more about Worksome and how it can help you with worker classification and more.