The anti-avoidance tax regulation of IR35 can be quite confusing. Although all contractors know that they must comply in order to not face financial penalties, the ‘IR35 test’ isn’t exactly straight forward. Basically, most contractors want to ensure that they’re operating outside IR35 as a self-employed entity, rather than inside IR35 as an employee of their end-client. Although HMRC has designed their own CEST (check employment status for tax) tool, it’s not thought to be entirely inaccurate. So, what are the rules to follow to ensure that you don’t fall inside IR35?
The difference between the public sector and private sector rules
Currently, there are different rules for contractors that work in the public sector compared to those who work in the private sector.
In the public sector, it is down to the end-client to make a decision on whether a contractor is inside or outside of IR35. To be inside IR35 means that the contractor is not in control of their own taxes and dividends and will be taxed in the same way as a permanent employee.
In the private sector, however, it is down to the contractor to decide whether they are working inside or outside of IR35. This will change in April 2020 when the private sector will be reformed in the same way as the public sector.
Find out more about complying with the rules in each sector with our articles, “IR35 in the private sector” and “IR35 in the public sector“.
Supervision, direction and control
The first ‘rule’ is that your contract should show a limited amount of involvement from the client when it comes to supervision, direction and control. So, what does this mean in terms of project completion? Basically, HMRC wants to see that you are running this project without significant input from the end-client.
If it is stated that you will be supervised by someone who is a permanent employee of your client, this could be determined as a close employer relationship. Similarly, if the contractor is supervising a team of permanent employees, the contractor could be viewed as a ‘disguised employee’.
Another point under this rule is the specification of working patterns. As a solo self-employed entity, you should be determining your working hours and set patterns as to how you’ll get the project complete. If this is not the case in your contract, you could be seen as working ‘inside IR35’ and be taxed as such.
Substitution
Another consideration to make is personal service and substitution. In the eyes of HMRC, you should be offering the client your services as opposed to offering yourself as a specific employee. For this reason, in the contract, it should specifically state that the services can be provided by someone else if you are not able to do so.
However, finding and funding a substitute should be down to you as a contractor. If the court can claim that the client will simply look for another employee like yourself in the case of a substitution, this could go against your case. Therefore, make sure that you claim you will have full control over substitution and do not require the client’s approval if you did have to make this decision.
Mutuality of obligation
This rule looks at whether there is an obligation from the contractor to carry out the proposed work, and whether there is an obligation from the end-client to provide consistent and paid work.
The main area of concern here is the date and timings of the contract. A contract that sits ‘outside IR35’ should have specific start and finish dates and not be ‘rolling’. A rolling contract indicates an ongoing contract and therefore a significant employer relationship, any indication of this could mean that you’re within IR35.
During the contract, there should be no mutuality of obligation either. One example of this would be during downtime or periods of shut down for the client.
Additional considerations to the IR35 rules
As well as the three main factors above, there are other considerations to make that a judge could look out for in proving that you’re inside IR35.
Whose equipment are you using to complete the project? Understandably, some of the equipment used to complete a job will be provided for by the client. But extra equipment such as mobile phones or company cars does suggest that you could be a disguised employee. If you are able to bring your own equipment to the job, this would support your case that you’re ‘outside IR35’.
When HMRC launch an IR35 investigation into your case, they’re looking to see that you operate just like any other business. This includes having business insurance, a company website, registered office address and set legal structure. All of these aspects indicate to HMRC that you are a self-employed entity and not in fact part of the business that you’re working for.
As a contractor, you’re entitled to work on as many projects as you want. If you are only working for your end-client at one time, this may cause HMRC to believe that you and your client have an employee-like relationship. Instead, keep your options open to other clients and ensure that your contract does not state that you cannot work for anyone else whilst the contract is open.
Ensuring you don’t get caught within IR35
Now that you’re aware of the rules, it’s important to take some steps so that you’re prepared for the private sector reform and to ensure you don’t get caught within the regulation. Not only may you experience penalties, but you will also have to change the way that you pay your tax and receive take-home pay. You can use an IR35 calculator to determine the significant pay difference between operating inside and outside IR35.
If you are caught within the legislation, HMRC will begin an official investigation. As part of this, they will examine your contract and working situation to determine if you are a ‘disguised employee’. They will look mainly at the points that we’ve outlined above to build your case. It’s possible that the investigation could go to a tribunal where you will require legal representation to fight your case and this could be a lengthy process. Bear in mind that HMRC can look into contracts from the past six years, so ensure that all of your past contracts were compliant too or else you could face a surprise investigation. You can again use the IR35 calculator to determine how much you may owe.
Use the rules to review your contract
Before you sign a contract with a new client, use the rules above to ensure that the contract is compliant with IR35. Have an open discussion with the client about any of the clauses that you’re unsure about and seek expert advice if you need to. Explain to your employer that you would like to operate outside of IR35 and that the contract must be compliant with these rules. This is the main step to take when ensuring you don’t get caught within the legislation as your contract is the key form of evidence that HMRC would use if a case went to tribunal.
Go through an intermediary
The IR35 legislation is complicated for many, even the professionals. For this reason, many contractors choose to go through an intermediary such as an umbrella company. An umbrella company acts as an employer for contractors and therefore is fully HMRC and IR35 compliant. Umbrella companies are a middle-man between the contractor and the end-client and often use a recruitment agency to match contractors to the ideal client. Using one of these companies can put your mind to rest when it comes to the IR35 legislation as they will do the administration and legwork for you so that you don’t get caught out. Use our online form on this page to find and compare umbrella companies that could help you today.
Purchase IR35 insurance
IR35 insurance is not exactly a tactic to ensure you don’t get caught, but it is one way to reduce the impact of an IR35 investigation if you find yourself at the centre of one. IR35 insurance companies can offer you financial protection in the event of an IR35 investigation that results in you having to owe HMRC money. With many IR35 companies, you are also presented with legal representation to help fight your case in a tribunal. Having this type of insurance can put your mind to rest when it comes to IR35 as you won’t experience unexpected fees or penalties if you’re found to be operating within IR35.
As we have discussed, there are many financial implications if you are found to be operating ‘inside IR35’. Although there are a certain set of rules that we’ve covered, the general point to keep in mind is that you should be acting as a solo entity and not part of the business that you are providing services for. There are steps that you can take to ensure that you aren’t caught and preparations that you can make in the case of an investigation. Start by being open with your clients and reviewing the contract in detail in comparison to the rules that we’ve discussed. Remember, you can also go through an intermediary with umbrella companies which have a range of benefits, and you should consider IR35 insurance which can provide essential protection.
Leave a Reply