With the days getting longer and lighter evenings to enjoy, many people’s thoughts turn to spring cleaning and “sorting things out”. Contractors are no different and now is a good time to dust off your contract and ensure that you understand your IR35 position before the end of the tax year.
What is IR35?
IR35 looks at contractors who provide their services via their own limited companies, but whose working practices and written contracts imply that they are actually ‘disguised employees’. If your contract work is deemed to be caught by IR35 your entire income from that particular contract will be subject to standard Income Tax and National Insurance Contributions, just like an employee.
If inside IR35 a deemed salary calculation is required and the "Fee Payer" must deduct PAYE tax and NICs from payments made to your company. In practice, it's usually more beneficial to use a PAYE solution like umbrella company employment while you're working inside IR35.
Who determines your IR35 status?
Unless your end client classes as a small private company, responsibility for determining your IR35 status sits with your end client but it is still worth forming your own opinion to understand your tax position and in case you wish to dispute your client's decision.
Background and previous status rulings
When you applied for the contract was it a post genuinely advertised for a contractor or was it really looking to cover a role previously fulfilled by an employee? If it was the latter then there is a good chance that the end client’s expectation was to fill the position with a worker who showed all the characteristics of an employee rather than someone running a business on their own account. This would weaken your case for being outside IR35.
Similarly, if HMRC have previously reviewed your end client's business and investigated contractors undertaking similar roles, it would be a good idea to found out how the investigation concluded. You want to ensure you can either make a distinction between your case and a previously HMRC determined status review or at least go into the contract accepting the IR35 status as previously decided.
The intention of the parties to the contract is also important. The contract should always state the intention of the arrangement and nature of the relationship between the parties specifically that it is not intended to be an employment relationship. To stand up to any scrutiny this intention must then be reflected in the actual behaviours and relationship between the parties.
To determine your IR35 status you need to imagine a hypothetical contract between yourself and your end client. With no statutory definition of what employment or self-employment look like we have to rely on case law to determine this – so it is all a matter of interpretation.
Case law directs us to consider these three main criteria
Control – it is important that you retain autonomy over how you undertake your contract. You should be engaged for your expert knowledge and for your ability to complete a particular project rather than fulfil an ongoing position at your end client. You should be able to demonstrate that you are not under the direction and supervision of your end client.
It is important that your contract does not dictate start and finish times, the days and hours you will work. These are classic terms found in employment contracts and will weaken your IR35 case.
Substitution – your contract should contain the right for your business to send a substitute to carry out the contract, subject to that person being equally able to undertake the role. The ability to substitute is a clear indication of being in business on your own account but be careful – if there are emails and correspondence between you and your end client that imply a substitute would not be allowed, despite the contract terms then the contract will probably fail IR35.
Mutuality of Obligation – make sure your contract does not restrict you from taking simultaneous projects from multiple clients. You are not obliged to accept additional projects and tasks from you end client – if you want to accept them make sure you have a separate agreement in writing.
Other factors to consider
As well as the three main areas of consideration outlined above, the courts have also indicated many other factors that can either help or hinder an outside IR35 status.
Financial risk is clearly something an employee does not face. As a contractor you should be able to demonstrate that you do not benefit from a regular guaranteed wage when completing a contract. You will invoice your end client for the work done and at particular project milestones and whilst you expect these invoices to be paid regularly and on time there is a risk that your invoice is paid late or that you have to undertake a lot of chasing to achieve this.
As a contractor any mistakes you make or bad advice you provide is down to you. You will most likely have to rectify the problems at your own expense, unable to charge the client for your time, whereas an employee may well be disciplined and asked to fix the issue but they are less likely to be penalised financially for the error.
You will need to invest in your own Professional Indemnity Insurance to cover any potential claims against you – employees don’t need to do this as they are covered by their employer’s policies.
Providing your own equipment is another good way to demonstrate that you are running your own business. If you find yourself required to use a client’s equipment, possibly for safety of security reasons this won’t generally be an issue that would make your contract inside IR35, assuming you can demonstrate a sound business case for this requirement.
Providing your own office space, working remotely and hours you choose as well as promoting yourself through your own website all add to the argument that you are outside IR35.
Contractors should distance themselves from such activities and take efforts to openly demonstrate their contractor status – add the word contractor to your name on the phone list or wear a visitors badge are a couple of ways you can do this.
Whilst IR35 can be complex, don’t sweep it under the carpet and think it does not apply to you. Getting your status wrong can be costly for you, your end client and your recruitment agency.
The good news is there is always help at hand. We have a lot more detail on how you can demonstrate and evidence your outside IR35 status in our full IR35 guide. Your accountant is here to assist with your queries and we work closely with Bauer & Cottrell, IR35 specialist experts who can provide comprehensive contract reviews and advice should you want to take this up.