IR35 is complex legislation, which is often misunderstood and can easily be administered incorrectly too. In this article, we aim to give you a better understanding of IR35 and how you can better support IR35 compliance as a supplier by correctly determining your IR35 status to help your client.
What is IR35?
We have covered IR35 in many previous posts and so we won’t go into too much detail here.
IR35 is a piece of tax legislation in the UK, which was designed to close a loophole in the tax system whereby contractors could set themselves up as a limited company in order to pay less tax. The IR35 legislation looks to identify contractors who are actually ‘deemed employees’ i.e. they are working under an employer-employee relationship rather than an employer-contractor relationship.
Why does IR35 compliance matter?
If HMRC investigates you as a contractor and discovers you have been working ‘outside IR35’ on a self-employed basis when in fact the service you have been providing your client with is ‘inside IR35’ then you will be required to pay an additional tax to the HMRC, plus penalties and interest – which could be very costly.
How to help support IR35 compliance
Your IR35 status can be difficult to determine unless you get professional help, as it is not as easy as just running through a checklist or taking a test. HMRC do use tests but they also take a holistic view of contracts as a whole and have extensive experience in determining what they perceive to be inside and outside of IR35.
There are things you can do, however, to try and determine what your own IR35 status might be:
#1 Think about the factors that contribute to IR35 status
Case Law laid out as far back as 1968 Identifies the following three key areas to help determine self-employment and therefore IR35 status:
- Personal Service (often referred to as The right of substitution) – are you offering your client genuine business to business services or is it a personal service? Are you able to offer a substitute worker to perform the duties you are contracted to do?
- Control – do your services fall under the direct control of the client or can you dictate how the work is performed? To what extent does your client control the services you carry out?
- Mutuality of Obligation (MOO) – is there an obligation for you to accept consistent and paid work from the client or for them to provide it to you?
There are also other factors about your working arrangements that you need to take into account, and these include:
- Financial risk – do you hold business insurance? Are you liable to rectify faults at your own cost?
- Non-exclusivity – are you contractually unable to carry out services for other clients? Can you work on concurrent contracts?
- Equipment – do you provide your own equipment, and if so, is it necessary for the job?
- Business trappings – does your business have its own identity, Website, email, business cards? Do you receive employee benefits such as holiday and sick pay?
#2 Review your contract based on the above factors
Read through your contract carefully and mark any clause which is relevant to any of the questions we have outlined above.
While your IR35 status won’t be based on your contract alone, it can give you a good indication as to whether you would be considered inside or outside of the legislation.
Outside IR35 indicators include:
- Your contract has a start and end date
- You have the right to offer a substitute worker to perform duties
- You have the freedom to carry out the work as you see fit
- You do not enjoy employee-type benefits
- Your company carries financial risk as you are liable for any mistakes you make
Inside IR35 indicators include:
- You have a rolling contract with no start and end date
- You are not able to offer a substitute worker
- Your client dictates how, when and where you provide them with your services
- Your client has an obligation to provide you with work, and you have an obligation to accept it
#3 Collect evidence to support your status
Many IR35 professionals advise that you start to collect evidence to support your IR35 status throughout your contract, with some examples of this being:
- Evidence that you informed your client of absence as a professional courtesy and not because you were requesting permission to be absent
- Evidence that you sent another contractor in to take your place
- Evidence that your email signature is different from that of your client
For people working in the public sector, this is all old news but from April 2021 the Private sector IR35 changes instigated by HMT will mean the decision making falling to your clients, so If you are seeking to remain outside IR35, are you doing all you can to make the decision easier for your clients? If you would like to discuss IR35, contractors and advice on ensuring your working relationships fall outside of IR35, then please email our managing director, Jonathon Webley, at email@example.com