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.
Who determines your IR35 status depends on the sector you are working in. If you're working in the Public Sector, your end client will inform you if the contract is inside or outside IR35. You can find more information about working in the Public Sector here. Currently if you are working in the Private sector your are responsible for determining your IR35 status and this won’t change going forward if your end client is deemed to be “small” in size. From April 2021, if your end client is a “medium” or “large” end client they will have to determine your IR35 status and share their decision with you.
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 clients 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 contractors should look out for when determining if the contract would be seen as inside or outside IR35.
Employee or Contractor?
Are you a good detective? Joking aside, you do need to do a background check on the advertised position. Ideally, you should find out:
Is it a new position?
Is it replacing an employee?
Has it always been a contract position?
If you feel confident, you could ring the hirer direct, or if an agent is involved ask them. Otherwise, a quick search on LinkedIn may reveal someone held the position before. If an employee held the position previously, there is a much higher chance of the contract falling inside IR35.
Has the end client had roles found to be inside IR35 before?
There is no denying this could be a little challenging to find out, but has the client already had an IR35 investigation? If you use an IR35 review service like Bauer and Cottrell, they may already know if the client has. Otherwise, you could ask on the ContractorUK forums if anyone has had experience with the client and the status of their position. If they have had a previous investigation, it's vital the contractor has their contract and working practices legally checked.
Control, substitution and Mutuality of obligation
The principle tests of IR35 compliance are employment tests. There are three key areas:
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.
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;
Regular monthly payments
Training provided the client
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.