IR35 was first introduced in April 2000 with the aim to address tax avoidance by individuals working in the role of an employee through an intermediary, such as a limited company. By working this way it is sometimes referred to as a “disguised employee” as it enables individuals and companies avoid tax and national insurance contributions which HMRC intend to recover.
April 2020 is seeing changes which may put the onus on the client rather than the contractor. However only companies which are not “small” (defined by the Companies Act 2006) will be subject to these new rules. Companies Act 2006 defines small if they satisfy 2 of the following:
Whilst the law now may not always require contractors to asses their own status (depending on the above) it is still advised that they play an active role in the process. Whilst you could use the CEST tool, it has been highly criticised, it isn’t representative of real life, relying on 16 questions to determine the status of often complex working relationships it is not always going to give a true reflection. Furthermore, there is a lot of uncertainty around IR35, a complex piece of legislation that even with case law and HMRC guidance, there is not a single simple answer to determine IR35 status.
It’s important you establish whether the contracts are inside or outside IR35. As a contractor, HMRC can investigate your arrangements at any time, and this can be time-consuming, costly and highly stressful. The financial impact of IR35 can be significant. If IR35 rules do apply to the contract, the fine would be the same as the Income Tax and National Insurance contributions the contractor would have paid if employed directly, rather than contracted to work through your limited company. HMRC can go back up to six years and evaluate past contracts to see if the legislation should have applied previously too.
The following are the key areas that would be looked at should you be investigated under IR35. Whether you are a contractor or engage with contractors the following applies:
Quite a biggy, setting the standards and the working practices in the beginning is an absolute must. The working practices of the relationship will need to reflect the written terms of the contract should there be an investigation. If the contract that has been written, bear no resemblance to the actual working practices, the written contract will likely be ignored by HMRC. However, it is the first thing they will look at. This is another example of why templated documents really do not accurately protect a business agreement.
Contracts should be checked for each project on renewal and must provide clear evidence to support any status as a self-employed professional engaging with a client rather than an employment relationship. The scope of the works should be described accurately and in great detail.
As a contractor – Have you own contract drafted. Every future assignment would then be on your terms and you know you have the control. If you have been given a contract to sign get it checked. We offer a document checking service for just £99 + VAT
As the client – Check the agreement you are distributing to your contractors is one that would fall outside IR35. If you don’t have one at all then by default the person you are engaging could be deemed as employed and land you in all sorts of trouble. Get a contract. We can help with that.
Before agreeing a contract, it is essential that there is confirmation that the contractor is in control of where, when, what and how the work is carried out. If a client wants to control these individuals, and stipulate times, days, office bound, then they must employ them.
X – Clients should not be telling contractors how to do the work, only confirming what work is required.
X – Contractors should not need to seek permission or need a sick note to take time off.
X – Contractors should not be involved in any appraisals or disciplinary hearings.
X – Contractors should not be told when to have a break.
In the contract ensure there is a comprehensive job specification. This specification would outline:
HMRC has been quoted as saying more generally that: “Where there are procedures, methods and instructions which must be followed, it is likely there will be SDC over the manner in which the services are provided.” Therefore, falling inside of IR35. It is worth noting that there have been exceptions to this as case law has developed.
Another test of ‘employment’ is whether the contractor can provide a substitute to do the work.
If the contractor is sick, or unable to complete the services for another reason the contract should be clear that they are able to send a substitute to complete the work on their behalf.
If the contractor can genuinely provide a ‘substitute’ and on occasion actually do, then the contract is likely to be outside the scope of IR35. You should ensure that there is a right of substitution clause in every contract whether you are a client or a contractor.
If the client is only interested in the suitability and skills of one contractor and no substitute can be offered or accepted and a substitution clause states this, this is usually a good indicator that the working arrangement of the contractor is that of an employee and are not self-employed.
Mutuality of obligation is another test to determine IR35 status. Mutuality of obligation means an employer is obliged to provide work and a worker is obliged to accept it which is the case in most employer-employee relationships. Genuine contractors who fall outside IR35 should neither expect nor receive such mutuality of obligation. A contractor should be engaged on a contract for services basis, to perform a specific task for a specific project, and once the project is over the contractor moves on, or may be offered a new project by the client.
The contract should allow the contractor to refuse work, work for other clients and as above be on a project by project basis. If the contract specifies exclusivity and states that the contractor must work a certain number of hours per week at a certain rate on an ongoing basis and requires the contractor to take whatever work the client throws at them, then this would suggest the contract should be inside IR35.
An IR35-proof contract must state the client has no obligation to offer work and any clauses to extend the contract should be avoided, it should state that it will be terminated at the end of the project and a new contract should be discussed once a project had been completed.
Contractors should not become part of the company furniture. They should not be on organisation charts or wall rotas, have business cards or a work email address and they certainly shouldn’t be answerable to anyone whilst performing their obligations. There should be no sick notes needed, no dictation on when a contractor takes a break and for how long, the only concern is that the work is done as per the contract.
Even having a security pass to the client’s building, or keys, or knowing the passcodes for different areas can indicate there is an ir35 concern. A contractor should be using his or her laptop, tools, mobile phone to ensure the separate contractual relationship.
Whilst many contractors will not have any stock or premises, a contractor can still demonstrate they are in business on their own account by having an accountant, having other clients, a Facebook page, a website, and providing invoices.
This article is intended as a guide only and does not replace specialist advice on any IR35 status. BEB Contract & Legal Services can provide more tailored advice to you as an individual or business and help you determine whether you’re at risk from IR35.