Contractors who get bonus payments are at major risk for HMRC to declare them inside of IR35. Bonuses are a direct sign of disguised employment. Contractors can actually receive bonuses without falling inside of iR35, but they have to handle them correctly.
Documentation details for the bonus can be the deciding factor that makes HMRC aware of the bonus and leads to an investigation. A bonus should never be called a ‘bonus’. The right wording is ‘completion payment’.
Another tip that all contractors should be using is an expert review of their contracts. HMRC will often begin their review with the contract, and vital clauses and other languages must be correct to avoid investigation. However, there are other items that they can look into, even if your contract is correct. If the contract leads them to become interested in payments, they will be able to look at completion dates related to milestones and specifications to complete work.
Employment Tests
Bonuses may be a tipping point in an investigation, but the key tests will still be control, substitution and MOO. Regarding MOO, you will want to be sure that the incentive scheme is not related to an obligation to perform work in exchange for the incentive. MOO continues to come to the forefront of investigation decisions. Hence, contractors need to be aware of their place in a potential investigation and make sure their contracts protect them from MOO.
For those contractors who are worried about the clauses associated with bonuses, there are many professionals out there who can review a contract and make sure that it fits the needs of the client, the contractor, and meets the requirements of IR35. Contractors are often discouraged from working on performance-related metrics for this reason, but that is a business reality that sometimes is necessary to be included in a contract.
This is one aspect of IR35 that will continue to plague the self-employed and contractors will need to stay on top of the changes on the horizon for those working outside of IR35 to make sure that they do not inadvertently affect their status as changes are made to the rules.
