IR35 - Best Practice – The foundation for Success

Managing IR35 and how you can reduce any risks when recruiting Interim Consultants

Due to uncertainties during IR35’s initial introduction and the ambiguity of elements of the legislation, it’s not surprising that many SME’s and private sector companies find managing IR35 a challenge or aren’t aware of the potential financial risk.

There is now a clear direction of travel from HMRC and greater investment by the labour government to support HMRC’s ability to challenge employers’ management of the process when recruiting Interim consultants and contractors and where required they can levy subsequent fines.

Therefore, IR35 needs to be treated seriously and managed in the correct way to ensure compliance and to minimise future financial consequences and reputational implications.

Lord supports clients to identify any risks and to evidence control of the process to HMRC when onboarding any new Interim consultant or contractor. 

Working closely with the C-suite, HR community or hiring managers, the key issues are usually based on the onboarding process, contract management, and best practice when checking IR35 status, to align Inside/Outside IR35 attribution.

Key Facts

An Inside IR35 or Outside IR35 contract assessment determines whether HMRC views a contractor as a genuine independent business (Outside) or as a "disguised" employee (Inside) for tax purposes under the UK’s off-payroll working rules.

If the assessment is Outside IR35 the Interim or Consultant will usually have their own limited company and will have an agreed invoicing cycle. If Inside IR35, the Interim or contractor will be paid via PAYE system to collect and pay the tax at source.

Lord operates a thorough and compliant IR35 process check, to ensure clients are protected. We manage the contract structure and payment mechanisms to support client’s cashflow and provide insurance to ensure clients are safeguarded from HMRC audits.

The process starts with a quick check of HMRC’s 3 core tests

HMRC have the right to evaluate both the written contract and your actual day-to-day working practices against these three primary legal core tests.

1)        Right of Substitution (Personal Service)

o   Outside IR35: The contract includes an unrestricted, genuine right to send a suitably qualified substitute to do the work at the Interim’s own expense, and the client's only role is to check the substitute's qualifications (not veto them). Lord provide a panel of substitutes to cover for this eventuality.

o   Inside IR35: This is when a client stipulates that they will only work with a specific individual and the Interim selected cannot send someone else to do their work.

2)        Control (Supervision, Direction, and Control)

o   Outside IR35: The Interim has autonomy over how, when, and where they deliver the project. They are hired to produce a specific result and not managed step-by-step.

o   Inside IR35: This is where the client dictates your specific working hours, requires approval for time off, dictates the methods or sequence of tasks, or moves the Interim consultant to ‘out of scope’ and unrelated tasks.

3)        Mutuality of Obligation (MOO)

o   Outside IR35: The engagement is project-specific with a clear start and end date, with no obligation for the client to offer future work and no obligation for the Interim to accept it.

o   Inside IR35: There is an ongoing expectation and mutual obligation of continuous work and availability.

However, to complicate the assessment process, there are grey areas. HMRC will also consider secondary indicators, which the Interim must be aware of;

Secondary Supporting Factors

• Financial Risk

  • Outside IR35: The Interim must bear the financial risk, such as rectifying defective work in their own time and expense. It’s therefore key to make sure they have their own professional insurances and have invested in their own business tools and any necessary supporting infrastructure.

  • Inside IR35: Little or no financial risk to the Interim; they are generally protected from loss and paid regardless of errors (beyond fixing them as part of their role).

    
    

• Basis of Payment

  • Outside IR35: Invoicing is typically tied to fixed time milestones, project deliverables, or completion stages rather than a standard open-ended hourly or weekly wage.

  • Inside IR35: Regular time-based payments (hourly, daily, or weekly rates) that closely mirror an employee's salary structure.

    
    

• Organisation (Integration)

  • Outside IR35: The Interim operates as an independent business and external consultant. They are excluded from normal staff benefits and any corporate organisational charts, etc.

  • Inside IR35: The Interim or contractor is heavily integrated into the client's internal team, appearing on staff lists, attending regular internal management meetings, managing staff, or receiving employee perks and benefits.

    
    

• Equipment (this is less of an issue based on companies IT security requirements)

  • Outside IR35: The consultant will normally use their own primary equipment and tools (exceptions are common in IT/security where clients mandate specific proprietary hardware or software).

  • Inside IR35: The Interim relies entirely on the client-supplied equipment, laptops, and internal networks and never uses their own tools (subject to the company’s IT security requirements).

    
    

Benefits of Lord Interim IR35 assessment Project support

·        Understand and address your level of risk.

·        Develop understanding of gaps in policy, process and ownership.               

·        Evidence to HMRC of company foundation for compliance.

·        IR35 insurance to protect you from financial risk.

·        Improved awareness for hiring managers.

·        Develops a legacy of control for the business.

Client Testimonial – Director, National Charity

“The whole project was enlightening and quickly identified areas for improvement for onboarding contractors. It also delivered greater confidence across the business, helping hiring managers to understand and manage the process effectively, from Interim selection to contract management. This combined with reduced risk, allowed us to move forward quickly with confidence and to develop a real return on investment during the project”.

Key to success is selecting the right Interim partner. The Lord Interim Associate network is built around experienced senior functional experts with years of proven successful project delivery expertise.

To find out more about Lord’s Interim management services & support, call Tony Goldsby; London Office on 020 7692 8968 or Birmingham Office on 0121 445 7900 – or email tgoldsby@lord.co.uk