If you are starting a new contract or have accepted an extension to an existing role, you must consider your IR35 status.Your IR35 status determines how you can withdraw funds from your Limited company so it’s important to get this right and avoid and nasty surprise tax bills!
As previously mentioned in our article What is IR35?, IR35 looks for “disguised employment”. If your working practices are seen to be inside of IR35, you will find yourself paying more tax and National Insurance Contributions.
In most cases your end client will be responsible for assessing your IR35 status. The only exceptions are if they class as a small private company, or are entirely based outside the UK, in which case you are responsible for assessing your own status.
Whoever is responsible, its important you understand your position. Ideally, you should ask for your contract as quickly as possible so you have plenty of time before your contract starts, to have its IR35 status checked. This will provide you with an opportunity to influence your end client's decision and if there are any inconsistencies between your working practices and your contract terms, you will have significant time to discuss the areas with your client and ensure that both are an accurate reflection of contract role you have been engaged to do.
At Orange Genie, we recommend you speak to IR35 specialists Bauer and Cottrell. Bauer and Cottrell will be able to review your contract and your working practices for your IR35 compliance. If your contract does fall inside of IR35, they will be able to explain why it does, and can make suggestions on how you could change your working practices or contract terms to strengthen your position. Where appropriate Bauer and Cottrell can negotiate on your behalf with your agency and/or client to strengthen/amend your contract.
If your contract falls outside of IR35 and HMRC choose to review your IR35 status Bauer and Cottrell will put the facts forward to HMRC, they have never lost a case yet, so you can rest assure you are in safe hands.
Below are a few tips on what kind of factors can affect if the contract would be seen as inside or outside IR35.
Control, substitution and Mutuality of obligation
The principle question is whether your relationship with the client is like employment. There is no statutory definition of employment, but the courts apply these employment tests. There are three key areas:
Control
Firstly, you will need to check your contract for any control clauses. As a contractor, it is expected you will have full control over your working practices and how you undertake your role. It is vital you have autonomy over how you achieve your end goal and are not under any direction or control. If there are any clauses which state the client has control over your working practices, you will be seen as an employee, and you will fail any IR35 test.
Substitution
Do you have to carry out the contract work yourself or could someone carry it out on your behalf? If for example you are ill, and you sent someone in on your behalf is this is allowed? If you do not have the right to send in a substitute, your contract will fail the substitution clause, and it's likely your contract would fall inside IR35.
Mutuality of obligation
Simply this means, you do not have to accept additional work from the end client either during the contract or at the end and your end client is not obliged to find you any further roles.
Mutuality should also not enforce exclusivity for the client. For example, if you wanted to take on contract work with another client you should be able to do so. As long as you can, your contract should fall outside of IR35.
Do you receive employee benefits?
If you get any benefits similar to an employee, your contract is likely to fall inside of IR35; these could include;
Guaranteed work
Regular monthly payments
Training provided the client
Holiday pay
Sick pay
Access to a company rewards portal
Attending the work Christmas party
To name a few! Ideally, you would raise your invoice at the end of project milestones, though if your client would prefer you raised your weekly or monthly, make sure you clearly outline the work. A general rule of thumb is if they are offering you any benefits you would expect as an employee, that probably means your contract is going to fall inside of IR35.
Your equipment or the clients?
If you are using your client's equipment, this does not mean you automatically fall within IR35. It depends on the reason why. It could be entirely understandable for safety and security purposes you would use your client's. If this is the case, ideally you should try and get a clause written into your contract stating you should buy and use your own equipment, where relevant.
Do you look like a permanent employee?
As a contractor, it is important you don’t get sucked into the company structure. This could be anything from appearing on a telephone list or managing an employee. If you start behaving like an employee, then you will find your contract will likely fall inside of IR35. As a contractor, you should only get involved in your project the only exception is necessary training you expected to carry out in your industry, such as; health and safety. Always remember if you appear to look like an employee it doesn’t matter what your contract states, you will fall inside of IR35.
What is expected of you and your client?
Does your contract clearly state what is expected of you and the client? It is important to highlight this is not an employee to employer relationship. Your contract will need to emphasise clearly what you the contractor are supplying to your client, who is your customer. For example, the contractor will provide a bespoke piece of software for the client. As long as this is clear, your contract would be deemed outside of IR35.
These are just a few of the points you need to think about when determining your IR35 status; we recommend you do speak to an IR35 specialist though before you sign your contract, to prevent any surprise tax bills.
