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IR35 - Preparing for April 2020Presented by
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Recruitment and employment law legal consultancy
Participated in
Agency Conduct Regulations 2003
Managed Service Company Rules 2007
Agency Tax Regulations various
Agency Workers Regulations 2010
IR35 public sector 2017
Employment law and Tribunal consultations - various
Specialism – contracts and advice for recruitment industry
Prevention rather than cure, contract, compliance and services innovation
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Since 1999 IR35 legal services and contracts
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Understand IR35, the legislation and what it is
Understanding the governance around the legislation
Who is the decision maker in determining if a new contract role is in or outside the scope?
How this may impact the ability to source permanent talent returning from freelance
Mitigation of risk
Administrative issues and how to practically apply IR35
How to continue using contractors within IR35
What happens to current contractors
How to get around IR35…!!
Today’s targets
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Some comments
“How to get around IR35
• Don’t attract HMRC’s attention in the first place
• Avoid replacing an employee• Pay for a contract review• Ensure you’re not named in the contract• Secure a ‘confirmation of arrangements’ from the client• Keep a contractor diary• Make sure you are not controlled• Secure a right of substitution and exercise it if possible• Avoid ‘mutuality of obligation’• Keep the client at arm’s length…….”
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IR35 – the intermediaries legislation
in place since 2000
tax arrangements for those working through Intermediaries
based on ‘deemed employment status’
Income Tax (Earnings & Pensions) Act 2003
• Chapter 8 (private sector)
• Chapter 10 (public authorities) since 2017
• New Chapter 10 from 6th April 2020
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• Applies to individual personally providing services to a client involving arrangements through a third party intermediary (e.g. PSC)
• Worker would be ‘employee for tax purposes’ if the engagement was direct - test is hypothetical assessment of employment status
• Office holders automatically deemed employees
For original IR35 Individual has a Material Interest in the intermediary - qualified as deemed (new law)
Material interest = beneficial owner or 5%+ interest PSC, 60% in partnership.
Terminology – ‘caught’, ‘outside’, ‘inside’, ‘IR35 friendly’, ‘IR35’
the basics
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Client
PSCintermediary
Individual
Client
RPO
Agency
PSC intermediary
Individual
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IR35 – the original intermediaries legislation Chapter 8
Risk an issue for contractors not employers
Significant financial benefit of falling outside IR35 rules as can clam relief on expenses and be paid by way of dividend
If ‘IR35 caught’ 95% treated as employment income, contractor entitled to 5% top slice exemption
Online calculators suggest difference
£300 per day rate = £750+ per month
£500 per day = £950+ per month
Attractive proposition for accountancy advice and simple contract reviews, leading to ‘serial non compliance’
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Opt out – R.32 Conduct Regulations
Disapplies:
most Agency Conduct Regulations, e.g
Greater transfer fees protection
Can withhold payment if client withholds
Avoids argument over detriment
Timing of contract issue to contractor
Lower risk of employment claims and Agency Workers Regulations claims
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Chapter 8 – PSCs attractive to all parties except
Primary reasons:
• After the event assessment
• After the event tax return
• Significant failure to report by contractors
• Tax avoidance schemes through ‘umbrellas’
Tax loss est. £1.3bn pa by 2023/4
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Chapter 10
• After the event assessment <> Before event
• After the event tax return <> PSC tax return unimportant
• Failure to report by contractors <> No longer relevant
• Tax avoidance schemes <> Defeated?
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Chapter 10 – public authority (Pub A)
Concept applied from April 2017
• Pub A Client makes IR35 status decision
• ‘Fee Payer’ liable for deemed employment taxes
• ‘IR35 caught’ contractor loses 5% expenses exemption
HMRC reports Increased Tax revenue and employees
HMRC now extending to private sector – April 2020
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The TaxesRegardless of decision by the Client – taxes only due when an arrangement is caught
Based on the sum that “can reasonably be taken to be for the services of the worker” - the PSC invoice?
Deduct VAT, materials, allowable expenses = deemed direct payment (DDP)
Deduct PAYE and Employee NICs from DDP and account to HMRC with Employer NICs on the DDP
Pay the net to the intermediary
Effect = increase hirer/agency overhead = employer NICs.
The tax debt arises for any payment made from 6th April onwards
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The deemed direct payment (DDP)
PSC invoice
D1. PAYE and employee NICs
D2.Employer NICs on DDP
total PSC invoice less VAT and allowable expenses and materials = DDP
HMRC receives from FP (with normal payroll return) D1. D2.
PSC receives full invoice and VAT less D1.
Employers NICs = a cost that must be factored in
New Tax application -Calculate on DDP
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Private sector ‘small companies’ excluded from scope
Key criteria 2 out of 3 of the following:
Annual turnover – not more than £10.2million
Balance Sheet total – not more than £5.1 million
Number of employees – not more than 50 (on average)
Note anti-avoidance rules exist to stop group and associated companies from taking advantage
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Concept - as in current Chapter 10
Contractor will no longer be the decision maker
The IR35 decision maker in all cases is ‘the Client’, the recipient of the individual’s services
Simple rule - party liable for the ‘contractor’ taxes is the ‘Fee Payer’ i.e. Client, where the hire is direct,
or
in a chain, the party that pays the PSC in other cases
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Client
PSC
Worker
Client = Fee Payer & responsible for deducting and accounting to HMRC
the Fee Payer? Direct hire
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Client
Agency
PSC
Worker
Agency = Fee Payer normallyClient = Fee Payer if non compliant
the Fee Payer? Recruitment supply chain
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Current rules
(a) Public Authority
(b) Confirmation of decision by the Client
(c) Before supply starts
(d) Inform the party with which it contracts
(e) Information to be passed down chain limited to first party
New rules – Ch10 existing v Ch10 amended
New rules
(a) Pub & Priv sector except small co’s
(b) Same but now called a Status Determination Statement (SDS)
(c) Same and during supply
(d) Inform the party with which it contracts and the worker, with reasons
(e) Information to be passed down entire chain
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New rules – Ch10 existing v Ch10 amended
Current liability
(a) Regardless of decision if arrangement is ‘caught’, tax and NICs payable by Fee Payer
(b) Client liable if no decision, no qs within 30 days or Fee Payer provides decision taken without reasonable care
New liability
(a) ‘Caught’ = Same
(b) Client liable in more circumstances
(c) Client must set up review process on application by contractor
(d) Chain liability for non compliance
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A statement as to whether there is a material interest in the intermediary (s.61U)
> 5% in the intermediary company
> 60% in partnership
Worker must ‘inform’ Fee Payer ‘potential deemed employer’
No confirmation means material interest deemed
Material interest triggers SDS requirement (S.61N)
Fraudulent document issued by worker or intermediary indicating no material interest in intermediary switches liability from Fee Payer to the worker
Consequences? Rule applies to any intermediary
Information from worker
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A statement by the Client that circumstances in s.61M(1)(d)
are met or not met –
• S.61M(1)(d) = assessment of deemed employee under hypothetical direct contract
• To be an SDS it must be given to worker with reasons and made taking reasonable care
Reasons must be relevant from an objective viewpoint, but no case law on this point
Reasonable care – best to assume that applies if reasons given are sensible – do not rely on this argument unless there is an HMRC investigation
The SDS – status determination statement
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Key points
It must be properly formulated – i.e. no reference to “IR35”
The reasons must be clear
Reasonable care must be overt
To be effective it must
Be given to the worker in all cases direct (Client to Worker)
Be given to next party in a chain.
If not valid SDS or not given to worker (including agency/umbrella worker), liability rests with the Client
If not valid SDS or not given to next in chain, liability rests with the Client
The SDS – status determination statement
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New rules – liability where no chain
The only IR35 decision maker on employment status is ‘the Client’
The Client – the person for whom the work is performed or is under an obligation to perform, where services are personally performed by the worker
If no chain the Client is always liable for the taxes unless the worker has provided Client with a no material interest statement
Fraudulent document is the only exception – liability passes to worker
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New rules – liability where chain
Primary liability in a chain relies on the rule: Highest in chain is the Client, lowest is the Intermediary
Fee Payer - is the party immediately above the Intermediary, normally the party that would apply the Taxes, but not liable for the Taxes if it is not a QP
Qualifying Person (QP)
A person given the SDS by a person immediately above – applies down to the Fee Payer (who applies the Taxes rule)
Not a QP if offshore or connected with the worker
Primary liability rests with the lowest person in chain who is a QP
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New rules – SDS issues
If SDS not given to Fee Payer,
• Whilst technically ok for FP to pay gross, no payment of taxes is the red flag for HMRC
• QP above may pay worker services element net (if SDS states ‘caught’) to the Agency = problem
If not valid – defence for FP if FP pays gross - failure to provide valid SDS results in primary liability changing up the line to the Client
Failure to pass on SDS results in primary liability shifting to last QP
Best practice -
Always check the SDS is given and valid
SDS conclusion triggers rate and options considerations
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Client
RPO
Agency
PSC
Worker
Recruitment supply chain
= SDSQP = primarily liable
QP = primarily
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New rules – disagreement
SDS received - agency/contractor unhappy
Caught conclusion – contractor concern
Not caught but likely to be incorrect- more likely agency concern
Representations to Client triggers disagreement process – Client must review and respond within 45 days
Client confirms original decision, or issues new SDS if it changes its view,
Failure to comply results in primary liability passing to the Client
Date of application of a changed decision:
Unclear, but HMRC guidance says original SDS applies during the period of consideration
Argument: SDS will have effect from the date of the original29
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liability – outsource
Outsourced decision and decision wrong, i.e. not caught when in fact caught
Client liable unless valid SDS provided
Note where negligence asserted this could conflict with reasonable care taken
Third party more likely to argue ‘not caught’ if self interested
Litigation more likely to ensue from ‘not caught’
Sources of third party reliance
Contractor, recruitment agency, accountancy, umbrella – do not outsource
No harm in client appointing agent, but avoid conflict of interest
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s.688AA ITEPA 2003
Authority for recovery of PAYE from any relevant person that should have been made by another person
‘Relevant person’ is any party to the arrangements
Equivalent NICs legislation likely
Final liability rests with all parties regardless of primary liability
Power to make regulations but no legislation yet drafted
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ConclusionIf conclusion ‘not caught’, risk exists for all in the chain =
Material interest notification essential; SDS essential
Fee Payer (not Client) Defences
• not QP as not given SDS, or SDS was not valid, e.g. Client did not take reasonable care OR arrangement was not caught, i.e taxes were not due to be paid
Investigation = hassle and risk = reflected in company accounts
So only decision maker is the Client, but chain cannot just rely on the Client’s decision
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Apportionment – where arrangement caughtPossible apportionment model for higher paid contractors
Based on the sum that “can reasonably be taken to be for the services of the worker”
Company invoice includes company overhead and charge for company services (e.g. making individual available)
IR35 taxes only apply to services of the worker = normal employment rate
Balance payable gross
Evidence of Client employee rate critical
Contractual terms critical
Savings for both Fee Payer and Contractor
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Apportionment – where arrangement caughtPossible apportionment model for higher paid contractors
Based on the sum that “can reasonably be taken to be for the services of the worker”
Possible to split invoice and pay part gross
Where charge is more than regular employee salary
Requires specific contracts
Significant savings
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Case law
Contracts and actual working practices
Mutuality of obligation
Supervision, Direction and Control
Financial risk
deemed employment status – the decision
Requirements under IR35 Personal service Intermediary Contracts
DifficultiesSubstitution?Company make up?None exist before supply?
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Not caught
Genuine project
Identified piece of work, no ongoing nature, identified end
No ability for hirer to change requirements save within agreed parameters
Business to business commercial contract
Caught
Risk – all other work is time/materials/skillset
Note Danger of alternative interpretations
deemed employment status
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‘Not caught’ – i.e. ‘no employment status for tax purposes’- pay gross Rates unaffected, no change in current payment arrangements Business to business relationship remains in place Gross payments can still be made Happy contractors and clients!
subject to risk of HMRC investigation wherever gross pay
‘Caught’ - i.e. deemed employment status so tax payable
Wholly safe, so long as chain is compliant and taxes are paid, but
Contractor may want to Appeal to client led disagreement process
Rate disagreement
Ongoing contractors as at 6th April may find caught decision affects their previous declared status – this important to recognise
‘Caught’ or ‘not caught’ – status
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Reviews of arrangements must be ongoing
At time of signing off timesheet?
If change from ‘not caught’ to ‘caught’
New SDS assessment required and sent to worker and chain
Terminate the contract as rates and arrangements will be affected, and
Put in place new terms, OR Build auto change provisions into your contract terms
In all cases ensure chain compliance as switch to ‘rules apply’ may result in inadvertent or deliberate non compliance –HMRC investigation
Change to status
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• Threat of employment claim? – all authorities contra this proposition currently
James v Greenwich
Cable & Wireless v Muscat
• Threat exists where change in status decided
• Contractor may have been claiming outside IR35 status previously
• No current law ‘discriminating against a contractor’, nor is one likely
• IR35 applying does not make the individual a worker or employee
• Blanket policy decision is acceptable?
Consequential effect of a ‘caught’ decision
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Our advice –
Avoid Conflict
Use solid expertise where circumstances warrant –employment status is a legal issue
Assess the job, and be realistic
Consider the alternatives
No one wants an investigation = hassle
Outsourcing assessment is not outsourcing risk
A tick box exercise is not enough
Offers of insurance cover may induce risky decisions
Resist temptation to be persuaded to declare ‘outside’
making the decision – the starting point
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CEST and other toolsDoes CEST help? https://www.tax.service.gov.uk/check-employment-status-for-tax/
Evidence only required where decision is ‘not caught’, but helpful to persuade contractors that arrangement is ‘caught’
If project arrangement - could provide supportive evidence
Genuine attempt to assist
Every tool depends on subjective input from Client which may not be complete
HMRC reserves right to argue that incorrect information was input
No tool assesses the contracts, which could affect the outcome, but contracts should reflect the arrangements
To be valid throughout all require ongoing use for each payment in case circumstances change
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Offsetting liability in contract terms
Factors
Clients will want full indemnities, but as they make decision agencies will want to resist
Mutual trust
Old mindset versus new
Only circumstances where liability arises are where Client indicates ‘not caught’?
Contracts
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Contracts
Agencies – want to avoid liability so strike fair balance
process to enable engagement of contractor
proper description of job where ‘not caught’ decision
certainty on rates
limited and fair indemnities
flexibility if status changes
transparency on decision making
Both parties – clauses in contracts will affect assessment by the recipient of options
The more liability an agency accepts, the less risk it will likely take on, i.e. not caught assessment
Unless…….
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Contracts
HMRC indicates best way to address the issues is by ensuring chain compliance
Looking ahead key factors for agencies and hirers:
Evidence of own compliance including
• Process for review of contracts
• Understanding of tax rules
• Avoidance of tax schemes
• Clarity on when SDS is required and who it should be given to
Evidence of compliance by third parties
Best practice – audit or get accreditation
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Direct hire – caught arrangement
switch from PSC to direct employment
Pros – no IR35 risk, no SDS requirement
Cons – employment rights and argument employment continuous
– rate adjustment
Options
continue to use PSC and meet NICs – caught
Pros - no risk,
Cons - possible dispute with contractor, rates
continue to use PSC and apply apportionment model - caught
Pros - lower risk, rate less affected? In practice no SDS requirement
Cons – risk still exist on company payment, lower risk dispute with contractor
May affect agency introduction margin only direct hire fee
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Options
Direct hire – caught arrangement
switch from PSC to umbrella engagement
Pros – low IR35 risk –
Cons – compliance check and worker material interest confirmation still necessary
commercial contract required, rate adjustment
PLUS loss of control - confidentiality, expenses and tax compliance, offshore/tax avoidance schemes, data protection, agency worker regulations, agency conduct regulations, umbrella charges, higher employment claim risk – is the umbrella a real employer?
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Options
Direct hire – not caught arrangement
Contract with PSC
Undertake status assessment and rely on ‘outside’ result
Pros – rate remains as before
Cons – assessment may produce incorrect ‘not caught’ result
risk of tax investigation
cost of assessment and ongoing checks
insurance cover may be a lure not a protection
essential advice suitably qualified and reliable
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OptionsConsultancy solution
Work undertaken by consultancy using PSC contractors
Requires specific consultancy contracts
Pros – IR35 responsibility and liability shifted from Client to consultancy which is then ‘the Client’, so Client is no longer liable
Cons – risk that HMRC considers end user still liable as Client
evidence required to support as only relevant where IR35 taxes due
contracts required - must be watertight reflecting the reality
consultancy model is not regulated employment business
separate non agency insurance for work required
Conclusion – a possible solution for project workforce
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Options
Agency (employment business) solutionsPSC – agency contracts with PSC as before on IR35 ‘not caught’ basis (assuming supportive SDS and worker confirmation provided)Pros – agency is Fee Payer, primarily liable, rates remain as beforeCons – high risk of investigation
– compliance check and contract indemnities critical– avoid use of PSC unless satisfied that arrangement is
definitely not caught or, if caught, that agency is paying in accordance with the tax rules– Compliance essential
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OptionsAgency (employment business) solutions
PAYE – engage on a contract of employment or contract for services, or uses umbrella (subject to umbrella issues)
Pros – no tax/ employment claims risk
– provides a work finding service, conduct regulation compliance
– helps with AWR advice and overall engagement management
- ‘no material interest’ rule applies, otherwise rules do not apply
- manages umbrella relationship (if any)
Cons – rates affected as employer NICs negates margin
worker entitled to agency worker rights
Conclusion – without umbrella = safest route as taxes paid and agency regulated, subject to client driven compliance checks
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Recommended actions for HR: Assess the job
If likely to be deemed employment, consider all options and act accordingly
Ascertain if intermediary, if none then rules do not apply
Umbrella is an intermediary, as is agency
Ascertain if worker has material interest and obtain statement from worker if direct, or confirmation from agency that agency has statement from the worker – possibly obtain copy statement
If no statement from worker assume material interest
If statement obtained or deemed create SDS and give to worker
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Steps to get ready Reality is that most contractor arrangements are caught Focus on those that may not be Make a policy decision on the option you wish to use For those that you wish to retain as PSCs, whether direct
or via an agency take recommended actions
Actions recommended: If SDS indicates ‘caught’ review contract requirement and
whether intermediary allowed or not, if not, obtain evidence from agency throughout engagement that no intermediary other than agency
If decision is to allow Agency or other intermediary give SDS to worker
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Steps to get ready If SDS is ‘caught’ and engagement is direct, pay intermediary
in line with rules IF SDS is ‘caught’ and there is a chain
ensure SDS compliance down the chain via contract terms and indemnities
ensure Fee Payer pays in line with payment rules, consider continuous verification, e.g. checking payslips
If SDS indicates ‘caught’ review contract requirement and whether intermediary allowed or not, if not, obtain evidence from agency throughout engagement that no intermediary other than agency
If SDS is ‘not caught’ and engagement is direct, pay intermediary gross
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Steps to get ready If SDS is ‘not caught’ and there is a chain
give SDS to next in line ensure next in line passes on SDS
Check conditions for ‘not caught’ SDS do not change If conditions change, review SDS and issue new one if
appropriate to worker and next in chain
For existing intermediaries where there is a material interest, e.g. a PSC due to run over 5th April 2020 Undertake job assessment as soon as possible, and prior to
the date If likely to be ‘caught’ inform worker and consider all options
in accordance with main recommendations Note that a formal caught assessment made from 6th April
2020 may impact on contractor’s pre April 2020 IR35 status.
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Grey areas
Avoid silver bullet suggestions , e.g. substitution, or interposing accountancy will accept liability, discussion about direction, supervision and control
• Avoid arguments re reasonable care – for agencies it is only a defence to liability when HMRC is investigating an ‘outside’ decision
• Avoid offers of multiple contract reviews – if one is needed there is risk and cost.
• Remember claimed IR35 insurance requires annual premium and may not be effective in 3 – 6 years time
Use indemnities only as the fall back
Prepare now
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Familiarise with related regulations
Agency Worker Regulations 2010.
These include
Understanding the qualifying period of 12 weeks continuous engagement
The rights a worker is entitled to for Equal terms and conditions including pay as in use by the Client Access to facilities provided by the hirer
Recognising the responsibilities an agency has Recognising the responsibilities an umbrella company has
Prepare now
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Contracts for contractors, agencies, umbrella
Proforma SDS
Proforma worker statement
IR35 assessment
Project description review
Contract and working practices assessment
Training/briefing
Chain compliance audit – agencies and umbrellas
Helpdesk
Lawspeed IR35 services
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Engagement contracts, employment and commercial
Employment, regulatory and tax status advice
In house training, masterclasses, webinars
Compliance auditing
Lawspeed group services – here to help
Independent Accreditation for recruitment companies
Standards set by industry stakeholders Audit establishes quality businesses CCS & NAHT approved education
Agency and HR platform Manage all your engagement contracts in one
place Control, issue and update terms, from anywhere Check usage, templates and history for ever Managed or own contract option
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Lawspeed group services – here to help
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[email protected] 236236
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