Extension of IR35 to private sector, Part 5 – all the gear but no idea? (UK)
If you appointed a decorator to paint your house, would you expect him to need to borrow your brushes? A window cleaner not to have his own ladders? A tax consultant to ask you to supply a calculator? Obviously (or at least hopefully) not.
One of the factors HMRC will look at in determining whether an individual would be your employee if he were not providing his services through a personal service company (PSC) is whether he provides his own tools and equipment (and as a subsidiary point, bears the risk of loss or damage to that kit himself). External businesses generally do, but employees generally don’t – there may be a lot of tutting and a possible admin charge when you lose your umpteenth company phone, but ultimately the employer will give you another one linked to all its systems if you need one to do your job.
To help side-step the new IR35 obligation to deduct tax on consultants’ fees in such circumstances, the end-user, therefore, needs to ensure so far as possible that the equipment, consumables, etc., used by the consultant are owned, insured and paid for by that PSC. As a general rule, the consultant should be contractually required to use his own phone, laptop, car, software, etc., as these are the direct equivalent of those brushes and ladders. We see a substantial number of contracts where end-users make equipment and facilities available to consultants which they should really be able to provide for themselves if they are genuinely in business on their own account doing what they are doing for the end-user. Put simply, how can you or the consultant claim that your business is just another customer of the PSC if that PSC lacks the basic tools necessary to operate in its chosen field?
There are exceptions – where your business has very specialised needs, it is possible that the consultant will not have equipment which exactly suits those requirements. Perhaps you need all access to your IT systems to be via a particular form of encryption which the consultant’s normally perfectly adequate IT kit won’t operate. Maybe your business poses particular and very unusual health and safety risks which it is not reasonable to expect every contractor to be equipped against. In such circumstances, it may be wise to note either in the contract with the PSC or elsewhere why a particular piece of equipment is to be provided by the end-user rather than by the consultant. He should use it only when required for that specific purpose and not for other tasks for which his own stuff is entirely suitable. Even then, it still makes sense from the IR35 perspective to require the contractor to maintain its own insurance against damage to your property, just as you would expect your decorator to pay if he spilt paint on your carpet. You might already have your own insurance covering damage to your household effects, but you would not expect to have to call on it in those circumstances.
The PSC contracts which are amongst the most vulnerable to reassessment under “new IR35” include those where there may be little or no tangible equipment used by the consultant in the performance of his duties. In those circumstances, the best that the end-user can do is to ensure that the PSC is bound both contractually and in reality to carry as many of the costs of providing its services as possible within its overall fee. That would include routine travel and accommodation costs, IT consumables, subsistence, telephone charges, parking, insurance, admin support and so on. This gives the PSC the ability to influence its own profitability by meeting those costs in the most economical way within the overall fee paid by the end-user. By contrast, the more of these fees which are expressly borne by the end-user business, the more the relationship looks like one of employment for IR35 purposes.
You may well get some push back from proposed consultants if you make them carry these costs, but remember that most of them can be used by the PSC as deductibles against taxable profit, so in the end, the consultant is scarcely worse off in consequence of your requirement that the PSC is responsible for such expenses. It is in their interests too that they can evidence being in business on their own account, so this should not be seen as a cheap excuse for pushing up the overall fee amount.