Give a Dog a Bonus

Posted on Aug 17, 09:06 PM

Give a Dog a Bonus

Once the shock finally wears off, I feel that I have to do something about it - hence this article. The latest ghoulish frightener to jump out from my computer screen and make my skin shiver, quiver and crawl is one of lastest offerings on Contractor Calculator. An article that appears to offer contractors strategies on how best to accept performance related bonuses from clients without harming their IR35 compliance status.

In your dreams. I’ll believe that when I see a recipe book that shows me how to make an omelette without breaking eggs.

So let me put you out of your misery right away. You can’t accept a performance related bonus from clients and safely remain outside IR35. Changing terminologies – a pet subject of mine, as some of you will know – won’t make a jot of difference. Calling a bonus a business-related incentive won’t turn a cat into a dog. It won’t alter the fact that you are accepting a quasi ‘employment’ incentive and not a business-related one. The only bonus a small business will get when they honour commitments to clients or end hirers, or they perform services well beyond client expectations, is to get welcome repeat business or, perhaps, the chance to re- negotiate a higher fee for similar work later on.

They don’t get a bonus.

To show HMRC that you are in business on your own account - the cornerstone of IR35 compliance – investigators demand – yes demand - evidence of how your company appears to be recognising and managing risk, which will separate non-risk taking employees from risk taking freelance sole traders and PSC owner managers. Taking business risks is incompatible with negotiated business fees so badly that they can't shoulder a loss or they must be cushioned by performance related bonuses for doing nothing more than delivering or exceeding client services beyond expectations. That’s what all small businesses do by default: deliver on client services the best they can. If they don’t deliver, they lower their final invoice to a mutually acceptable level or they don’t invoice at all should their work be seriously substandard. If a freelancer, a small firm or company insist on final payment from a client for their own shortfall in standards - or rips off the client, to put it more concisely - they risk losing that client altogether. They don’t get paid as usual and denied a tantilising bonus.

To avoid the Inside IR35 bonus trap:

- If working for your own clients, negotiate a fixed fee for the entire project if you can.

- If you can only negotiate a daily (or hourly rate), with no chance of negotiating a fixed fee, make sure that the fee rate covers all eventualities: the project is cut short, leaving a cash flow problem down the line, or the fee leaves you well incentivised to deliver a first class Rolls Royce service likely to pay off with repeat business or an extension/renewal from an end-hirer.

Of course, if you feel that you’ve done fabulously well for a client, a bottle of bubbly might not suffice if a ton of repeat business comes your way. Instead of going cap in hand to the client for an additional wedge, you can always enjoy the surplus fee from finishing work earlier than you expected to – if you negotiated a fixed fee or you can reinvest the surplus into the business, which could result in higher turnover later on. Or, if you were paid a daily rate through a PSC, you can always pay yourself an extra fat, profit-related dividend from your pre-negotiated business fee and scarper off to the Caribbean for a fortnight’s well-deserved relaxation. That’s what dividends are for, aren’t they? To incentivise and reward from profits not to bolster your salary – another glaring red flag for IR35 investigators.. That’s bonus enough, isn’t it? 

Far better to do that than being reckless to the point of stupidity and risk paying HMRC that extra fat-cat bonus instead.

Bel Grant