1. IR35 Explained: What It Is and How It Affects UK Contractors
IR35 was introduced in 2000 to determine the employment status, for tax, of individuals who provide their services through their own limited companies.
All too often independent contractors, working through their own limited companies, are entitled to receive advantageous tax treatment on their earnings, in that they can claim expenses and take the bulk of their profit by way of dividends.
On the other hand workers who are considered to be working as “disguised employees” of the end client are only entitled to receive income that is taxed on a PAYE/NI basis.
Since 2000 the IR35 rules have been largely ineffective, because in the private sector, it is the contractor who determines their own individual IR35 employment status. Not surprisingly, HMRC believe there is widespread non-compliance with the rules, resulting in a tax shortfall to HMRC.
In April 2017 the government moved the goal posts by gaining the use of IR35 in the public sector. As a result, the Civil Service, Local Government, NHS Trusts and others found that they had to review all their contractors contracts and bring many inhouse as employees.
2. IR35 Private Sector Reform
In late Summer 2019 the draft legislation was due for release to cover the private sector, with a view to implementation in April 2020.
Under the draft legislation all companies must take “reasonable care” when assessing if roles are inside or outside IR35. Taking a blanket approach to assess all these rules won’t deliver this. Firms must show they have carried out individual assessments.
The potential financial penalties can be significant if incorrect steps are taken.
3. How to Stay Outside IR35
The following factors will help demonstrate that you are not a disguised employee onsite and caught by IR35.
Make Sure Your Contracts Accurately Reflect Your Working Arrangements
It makes little sense having a contract that states that you will be subject to the control of the client, or that the client’s processes and procedures will apply to you when they don’t in practice. Also, make sure that the contract between the agency and the client does not contain anything that contradicts your contract with your agency.
It would make good practice, if you work through an agency, to ensure the client is in agreement with the key IR35 clauses contained within the contract. If the contract contains a substitution clause, but the client says that this isn’t workable, this could make the contract a sham meaning that you would be unable to rely on such clauses.
We always recommend that you provide a copy of your contract to Legal Services before you sign, in order to ensure that the contract supports your position as a true independent contractor.
Align With Your Client on Your Independent Contractor Status
If your client sees you as an extension of its own workforce, the company is more likely to treat you as an employee. Make sure they know that you have been contracted for a specific reason and that they treat you as an independent of their organisation throughout your assignment. If they integrate you into the organisation in a similar way to how they integrate employees, this will be damaging to your IR35 status.
This is particularly important when your client representative (i.e., The person who would liaise with HMRC in the event of an IR35 enquiry) is different from the individual who hired your services or worked with you day to day at the outset of the project. If necessary, provide a copy of your contract to the client representative or even agree a “working practices statement” which sets out how you intend to work/be treated whilst on an assignment with the client to avoid any misunderstandings.
Show HMRC You Are Treated Differently From Permanent Employees
Different pay and benefits alone will not be enough to support your status as an independent contractor. Flexible working, working on multiple assignments for different client, providing your own equipment, working on a specific package of work for a fixed fee and/or a fixed period are all good ways of showing that you are truly independent.
Work on Short-Term Projects to Strengthen Your IR35 Position
Whilst providing services on an assignment that lasts a number of years, will not bring you within IR35, it would make good practice to work on short-term projects. By doing so, you will build a client base, which can make it difficult for HMRC to say you are an employee of one of your clients.
How Demonstrating Financial Risk Supports Your Outside IR35 Status
HMRC like to see independent contractors showing a lack of financial security and from time to time incurring losses, even though this doesn’t make good business sense. This could involve you showing that you have financial risk in terms of bad debts, rectifying work at your own cost and investing in your company, all good “badges of trade”. Keep records of any such instances occurring as they will prove useful in the event of an IR35 enquiry.
Work With Multiple Clients to Prove You Are Genuinely Self-Employed
The more clients you work for, the easier it is to demonstrate that you are self-employed, whereas only having one client as your sole source of income for a lengthy period of time may suggest that you are working on an ongoing basis, similar to an employee. To counteract this, pay for your own training and provide as much of your own equipment as possible and pay for them through your business to ensure they are properly accounted for.
IR35 and Recruitment Agencies: Understanding Your Liability in the Supply Chain
Unfortunately the consultation document has created a confused liability picture for clients and their agencies.
The consultation document suggests that intermediaries in the supply chain will have an obligation to pass the status determination decisions down to supply chain; and if HMRC identifies a tax shortfall, they will look in the first instance, to the intermediary that they believe has failed to fulfill its statutory obligation.
In addition, the consultation document is proposing that in the event that HMRC fails to recover any tax shortfall from the failing intermediary, it will then look to the Agency that has the contract with the end client.
