The Conduct of Employment Agency and Employment Business Regulations 2003 are intended to control the activities of businesses who supply temporary workers and to offer some degree of employee-like protection to those workers.

As written the Regulations also embrace the more independent freelance contractor, hence the existence of the Opt Out (of which more later) for those who do not wish to be in scope.

The regulations are largely irrelevant to the average freelance, but they do provide a couple of provisions that may have a value. They limit the length of any handcuff clause that prevents you leaving the agency to go direct with your client to a maximum of 8 weeks and they require the agency to pay you for work done even if they themselves have not been paid. You also retain some protections in some more obscure areas such as Health and Safety training, hours worked and the right not to be penalised in any way for moving to another agency or client.

On the other hand, there will be conditions on the supply of substitutes that may affect your Right of Substitution clause. Also the agency will be required to perform detailed checks on your identity and residency that some may find over-intrusive. Furthermore, because the agency is required to carry out significant extra work when setting up an opted-in contract, the delay may mean you lose out in the race to secure a new contract.

As a result you can choose to opt out of the regulations in their entirety.

The main reason for opting out, though, is that you save the agency that extra effort and in return can negotiate some more favourable terms to support your IR35 status, mostly in the areas of Control and Substitution. Also, by foregoing the right to guaranteed payment you are demonstrating more financial risk than if the Regulations applied. Note, however, that whether or not you are opted out, there is no direct impact on IR35 that would affect an investigation.

To opt out of the regulations, you need to advise the agency in writing both as an individual worker and on behalf of your company (or your umbrella company if you use one) that you do not wish the regulations to apply to this particular engagement. You must do this before you are introduced to the client, which in practice means before you go for interview.

Finally, note that the Regulations only apply to engagements through an agency. If you are working directly for the client, they do not apply at all.

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I was reading the various contractor-related bulletin boards over the weekend (as you do…) and I was struck yet again by the number of people in this game who don’t really understand  the business they’re in.

There’s a lot to understand and nobody expects you to be a combination of chartered accountant, tax barrister and employment law expert, but some idea of the basics would be good.

Open your eyes

It’s not like there isn’t plenty of information out there. I’ve long been a fan of the PCG’s free Guide to Freelancing but there are plenty of others out there on the end of a Google search. However, the key bits that keep coming up are IR35 (gosh!), expenses and opting in or out of the Agency Regulations. I thought a brief overview now might be useful..

IR35

IR35 is a total mystery. I’ve been looking into it for ten years and I still don’t have a clue how anyone is supposed to know if they’re in or out: not only is it incredibly wooly, the rules change on almost every case that comes to court. It hinges on three factors – Direction and Control (which is imperfectly defined), Mutuality of Obligation (very basically, does the client have to provide work or pay you if there is none to do) and a Right of Substitution (can you send someone else to do the work).  Minimal D&C, minimal MOO or a definite ROS will theoretically put you outside IR35, but you’ll need an expert to prove it. Equally importantly, these actually have to be in place, not just covered in the contractual wording: cases have been lost when contract clauses have been shown to be unsupported by the client.

Contractor Expenses

Expenses are dead simple. If you spend money that is wholly and exclusively for the execution of your business, then it’s allowable against your personal taxation. If they aren’t, you can still claim them but you pay tax as though they were straight earned income. So travel to work is fine but a 48? plasma screen monitor for the PC isn’t. Nor, oddly enough, is training unless it is directly related to the job you are currently doing. Needless to say there is room for interpretation about “directly related”, but that needs professional advice.

2003 Agency Regulations

The Opt Out causes enormous confusion. The Agency Regulations are there to protect vulnerable temporary staff from exploitation. Sadly they are written so virtually any freelance working through an agency is in scope, so you have the option to say you don’t want them to apply to any given engagement. The thing is, you can’t opt out if the client knows who you are (i.e., you’ve been introduced to them) so most people are opted in regardless. Whether or not that’s a good thing is up for debate; there are some slight commercial benefits, but you’re likely to have a worse contract in IR35 terms. The agencies want you to opt out because it saves them a lot of work, of course.

To summarise

As I said at the beginning, the average freelancer needs a whole gamut of skills if they are going to be certain they fully understand their position and responsibilities. They need to be fairly certain of their position with respect to IR35, if only because you have to make an informed assessment of your tax position if you are to avoid penalties if HMRC manage to prove you wrong. You’ll already be paying a big lump of extra tax plus interest; penalties would be the icing on the cake. So make sure your accountant properly understands IR35 as well as the more usual financial issues; it can make a big difference.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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