Are you working under a retainer? IR35 can be tricky when you are paid a flat rate retainer every month
What is a retainer?
A retainer contract is when you are paid a set amount of money every month regardless of whether you do any work. Retainer agreements can have a low baseline and make provision for all the work you do to be charged at a particular day or hourly rate (usually a beneficial one for retainer clients) or the retainer agreement can include a specified amount of work or time every month after which the client may pay more. Some retainers allow for a carry forward of all or some unused time from one month to another. Others don’t.
Some retainers are continuing until someone gives notice – and others are for a specified period – often of six months or a year. Retainer contracts can be simple, or complicated – we have seen a lot of variations. But they have one key thing in common – knowing you will be paid at least a certain amount each month.
For a business owner providing services, a retainer can be a real blessing since it means you are not starting at ground zero every month when it comes to making your revenue. If you start your month with a thousand pounds worth of retainers, then you know that is the minimum you are going to earn that month.
What is IR35?
If you are running a service business in the UK you will be hearing a lot about IR35 in 2020. Despite all the complications, IR35 itself is not changing but what is changing is who is responsible for deciding whether you should be receiving all the money you invoice on a self-employed basis or subject to deductions at source. We have blogged regularly over the last few years about what it is, what the tests are and what it means to you. Here is a link to our most recent post on Top 10 things you should know about IR35 that will help you work out more about how this may affect you – click here.
What does IR35 do to my retainer?
We all know that tax and regulation can be seriously boring, but this is one issue that will seriously affect you. Why? Because if your client is ‘within scope’ for IR35 and decides you are also ‘within scope’ you are not going to get the full face value of your invoices paid. Not only is it legal for them to withhold money – they are going to be obliged to do so!
You can find them withholding up to 25% of the face value of your invoice!
That’s a big cashflow hit and there is no clear cut or quick route to get that money back if it turns out you paid too much tax.
If you are working as a solopreneur your retainer will put you at risk of having these deductions made (of if you don’t have a company it may push you onto PAYE instead – see our earlier article).
Either way this is going to result in less cash at the end of the month for the same amount of work.
What is the test for IR35?
The test for who is covered by IR35 is based on the contract between you and your client. However, simply putting in the contract “IR35 does not apply” has no effect. The test looks at how you work. If you can’t tick the right boxes for self-employment you will fall within IR35.
There is a whole matrix of criteria and even HMRC’s own tests don’t always come up with the right results – they have been to court a lot during 2019 and a lot has been happening with legal decisions and clarification of the law. However, what is clear is that if you act like an employee and are managed like an employee, your contract is likely to fall within IR35. It is the contract that is tested, not you. So you can have two contracts at the same time, one within IR35 and one outside. While it is helpful to have more than one client, on its own that does not show you are not in ‘disguised employment’. You could have two part-time jobs for example – the number of jobs does not determine the status of the contract.
It is not nearly as clear cut as it could be.
Some of the key tests for IR35 are:
- substitution – you need the right to send a substitute (at your own expense) and ideally evidence that you have done so.
- risking profit or loss. If you are being paid to do nothing under an ongoing retainer you are not risking much. If this is combined with additional hourly fees if you do end up doing something, then it is the client who risks making a profit on your work – not you.
- who determines working methods, hours and availability. If your client controls how and when you work they are controlling you. Business owners deliver a service, but how it is done in terms of technical expertise is usually up to us!
- an ongoing expectation of further work. This is where a retainer can put the final nail in the coffin if it goes on indefinitely, particularly if it can only end with a period of notice.
What can you do if you are worried your retainer may be within IR35?
You can start by doing HMRC’s own test (it can be done anonymously) You can find it here. While everyone agrees it is not really accurate, this is where your client is likely to start so it is helpful to see what results they are going to get. If they are a large client it is their decision that counts – even if it is a wrong one. If you are working for a smaller client, then it is your job to assess your status.
Don’t fall into the trap of lying on the test, or trying to game the test. If your contract and your test answers do not accurately reflect the way you work with a particular client, HMRC can go behind the contract and things can get expensive pretty fast.
If the results of the test are your contract is within scope of IR35 you are going to need to think about your business model, your pricing strategy and more.
Don’t let tax be your only focus
There is a lot more to creating and running a successful contract than simply looking at the tax. While it is a great idea to look at where you stand and make the appropriate adjustments to your fee rates if you are a risk of deductions, you won’t want to abandon all retainers ‘just in case’.
Your terms of business – which form the basis of your contract with your client, should reflect the business model as a whole. It is quite a dark art to control the data flow for GDPR purposes, without controlling the person and bringing them within scope of IR35.
Talk to us about retainer contracts and IR35
If you are an existing KoffeeKlatch customer – all you need to do is contact us inside the KoffeeKlatch customer support group. Support and advice are included in your contract purchase price for a minimum of 6 months from your purchase (more if you purchased at Standard or Premium level). We run regular webinars and the replays are available in the support group. We can also answer your individual questions inside the group.
If you’d like to know more about our terms of business for PRs, VAs, Bookkeepers, Web Designers, Social Media Managers, Digital Marketing Managers, Graphic Designers and more – click here