With the IR35 reform due in April 2020, it’s important that you’re fully aware of your IR35 status. Determining whether your inside or outside IR35 is important as the implications of being caught by the legislation can be significant. In fact, you can find out the difference between being inside and outside IR35 with our IR35 calculator.
IR35 changes have already affected IR35 workers in the public sector and the IR35 private sector reform will follow a similar route. From April 2020, the tax liability for all contractors and freelancers will sit with their end-client. Of course, you don’t want this determination to come as a surprise so it’s a good idea to get clued up on your own situation. Read on as we discuss the IR35 test and the ways you can determine if you will pass.
The IR35 test
HMRC have recently cracked down on contractors who are working under the IR35 legislation. The legislation was originally passed to target workers who were acting as ‘disguised employees’. Without their operation through a limited company, these workers would otherwise be classed as permanent employees of their end-client. By acting through their limited company, they are able to pay less tax and complete their own tax assessment. The IR35 test is ultimately how HMRC deem your employment relationship with your client if it is seen as significant, it’s likely you’ll be seen to be operating within IR35.
The supervision of your client
A key indicator in an IR35 investigation of whether you’re operating inside or outside the legislation is the level of supervision that you receive from your end-client. Ultimately, it should be you as a contractor who determines the best way to complete a project and you as the expert should plan how this is done. If it is revealed that your client is constantly supervising the completion of the project, and perhaps providing their input, it could be determined that you’re operating within IR35. For this reason, in your contract, it should explicitly state that your client is trusting you to complete the job without any further supervision from them. Consider the level of supervision that you receive as one way to test your IR35 status.
Your working patterns
Another consideration to make when testing your IR35 status is your working patterns. Similar to the point above, your client should have little say in your working patterns and the timings of which you complete the job. Instead, as your own boss, you should be setting your own working patterns (including hours and number of days worked) in order to complete the job within the given time. Again, this should be clearly stated in your contract. Bear in mind that, as part of an IR35 investigation, HMRC can gather statements from your end-client. Therefore, if they state that they do determine your working hours, even if it is not in the contract, you may face the fines.
The obligation between you and your client
Carefully consider the obligation that is present between you and your client. First of all, do you feel obliged to accept work from this company? If so, you may be inside IR35. As a separate entity, you should have the ability to accept and decline projects as you please. Similarly, if it is discovered that your client feels obliged to offer you work or extend your contract, HMRC could determine that you both have a significant employer relationship.
The issue with substitution
HMRC believe that you are offering your end-client your services, and not yourself as an employee. Therefore, if it is discovered that they have requested you specifically and will not accept the work from anyone else, this could be seen as operations within IR35. In your contract, it should clearly state that if you are not able to complete the work, you will send a substitute in your place. As part of this agreement, you are expected to fund this substitute and do not need approval from the client.
The date and timings of your contract
Another way to test your IR35 status is by examining the date and timings in your contract. It should clearly specify the date and times that you start the project and when they should finish. If these details are not specifically stated, the contract could be deemed to be a rolling contract. In the eyes of HMRC, this is a significant indicator of an employee relationship, implying that you are a permanent employee of your end-client. Before agreeing to any future contracts, ensure that you lookout for this to avoid being found within IR35.
The equipment you use
Whose equipment do you use when you’re completing a project? Although this may sound minor, this can be a big indicator to HMRC as to whether you’re operating inside or outside of IR35. Understandably, there may be some equipment that you use that belongs to the end-client, however, this should be limited. Ultimately, as your own business, you should own your own resources that are required to complete the job. Of course, there are exceptions such as fixed computers for IT contractors but the use of these should be carefully considered. If you are provided with a company mobile or car, this could be an indication of permanent employment to an investigator. Instead, use your own resources where you can and be careful when accepting anything else from your end-client.
Your business operations
As discussed, HMRC is looking for indicators that you are your own business. Think about the way that you operate and what you own and whether it’s clear that you aren’t a part of your end-client. Owning and running your own website suggests that you are your own boss for example. Similarly, having your own physical office can prove to the Revenue that you are an official and registered business and are not working as an employee of another company. A set legal structure and business insurance are two more factors that can support your claim as a legitimate contractor or freelancer.
Communication with your client or intermediary
Check your IR35 status by communicating with your end-client. As we discussed, after the April 2020 reform, it will be down to all end-clients to determine your IR35 status unless you operate through an intermediary. Therefore, it’s a good idea to be open with your end-client and talk about the legislation. IR35 can be complicated legislation to get your head around and try to ensure that your client understands the subject as much as possible so that they can make an informed decision when determining your IR35 status.
Many contractors and freelancers choose to operate through an umbrella company. With a company like this, you essentially become an employee of the umbrella company and therefore all of your tax legislations are managed by them. All of our umbrella companies are IR35 and HMRC compliant – you can use the form on this page to find and compare companies that could match your contractor needs. These companies are fully informed on the IR35 legislation and you can discuss your status in detail with them with no concerns of a future investigation.
The number of clients you have
The number of clients that you have can be an indicator as to whether you’re operating inside or outside of the IR35 legislation. This factor is linked to the point about obligation. The idea behind this is that if you’re only working for one client over a prolonged period of time, this could be seen as disguised employment. Instead, as a contractor, you’re expected to have multiple clients and not be contracted to only working for one company. Bear this in mind when you’re testing your own IR35 status.
How you complete the project
Take a step back from your project and consider the ways in which you’re completing it. Are you abiding by a certain set of rules? Are you adapting your services to match the specific requirements of your client? If the answer is yes to the above, you need to consider whether you’re acting as a sole entity or a disguised employee. As we discussed, your end client should have minimum input into your project, and you should be providing a similar service to all your clients.
Other ways to prepare for IR35
The above tips are certainly ways that you can check your own IR35 status, but what else can you do to prepare for the legislation? You should keep in mind that HMRC can launch an investigation into contracts from the previous six years. It’s worth preparing for any unexpected fines and penalties by working out how much you may owe if it’s discovered that you were operating within IR35 during this time. You can use an IR35 calculator to find out how much this could total.
Another way to prepare is to take out IR35 insurance. With this type of insurance, you are financially covered if you are ever found to be operating within the legislation. Bearing in mind that in previous cases some contractors have owed tens of thousands of pounds, this type of insurance is certainly something to consider. As part of an insurance package, you can also be provided with expert representation who will fight your case if you ever find that your investigation must go to court. Investigations can be stressful and lengthy and having someone to deal with HMRC for you can be a blessing when you have to continue to earn money.
As we can see, there are ten main ways to test your own IR35 status, based on the IR35 rules. However, you must remember that HMRC can go back many years to see if you’ve been consistently compliant and it is worth taking other measures to ensure that you’re not caught out with any surprising fines or penalties.
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