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Accountancy

What Contractors Can Learn from HMRC’s Latest IR35 Loss

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The key lessons from the Kaye Adams IR35 case

This case had some unusual features that should be taken into account by contractors and clients going forward. Most notably, Adams was found to be outside the scope of IR35 despite the requirements of personal service, mutuality of obligation and control all being met, on the basis that she was in business on her own account. Great importance was also given to her evidence on how she operated, which is information many clients won’t have when determining IR35 status.

There are several important points that contractors can take forward from this:

Check Employment Status for Tax (CEST) should not be relied upon

The Government’s own online tool would have found Kaye Adams to be clearly inside IR35, and this highlights the fact that it isn’t reliable. CEST has been criticised since it’s launch in 2017 for excluding certain key status indicators, and over-relying on others. However, in this case correcting this bias would not have helped and the issue is more fundamental.

CEST relies on answers to a relatively small number of questions, which cannot reproduce all real-life situations. It doesn’t look at all the elements necessary for a full review, and must ignore any number of nuances that may affect a court’s decision. For this reason, if your end client insists on using CEST as part of their IR35 determination process, it’s important that it isn’t the only resource they use.  

The importance of being in business on your own account

Being in business on your own account is often seen as a secondary factor in IR35 determinations. However, as this case demonstrates, it’s also the main thing IR35 determinations are designed to examine – are you employed, or are you genuinely running a business?

What we mean by “in business on your own account”

The battle is to demonstrate that your limited company is a genuine business, rather than just a vehicle through which you get paid. The following are usually good indications that you’re running a business:

  • Working for more than one client: Employees are more likely to work for a single employer, while business owners are likely to service as many customers as they can. This isn’t conclusive on its own, but working for several different clients can work in your favour – particularly if you’re engaged on multiple contracts at the same time.

  • Growing and investing in your business: Actively trying to grow your business and your brand is a good indication that you’re operating like a business owner. This can include the purchase of equipment or software to improve your efficiency, undertaking marketing activity or investing in training to open up new markets.

  • Seeking new business:  If you’re in business on your own account, the ability to reliably source new contracting work is often the main factor determining success or failure and you can expect to spend time and effort trying to secure new work.

Collaboration is key

Where there is a difference between the written contract and the day to day reality of how the contract is fulfilled, the reality of the situation will take precedence. It’s therefore extremely important to ensure that the written contract and the conduct of the contract match up.

In the Kaye Adams case, particular importance was given to the contractor’s evidence on how she operated. Following the reform in April, many IR35 determinations will be made without such information, as end clients will not have access to it.

It’s in the interests of both contractors and end clients to collaborate wherever possible to ensure the contract matches the reality, and that the client has all the relevant information, so correct conclusion can be reached.

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