We need to begin with the question “Does IR35 apply to me?”. If you are in any freelance contracting position where you are not directly on a company’s payroll, then you could be at risk of being caught inside IR35.
This applies to contractors or freelancers working through their own limited company, as sole traders or as self-employed workers. Feel free to watch our IR35 video below or simply scroll down to continue reading...
Depending on how you are treated at the client site, HMRC will either see you as an employee of the client or a legitimate business carrying out their services as normal.
Obviously being seen as an employee while you are running your own company or proving freelance work is not an outcome many contractors and freelancers want. Why? Because of a very high and unexpected tax bill.
First we must establish the IR35 rules that are most important when deciding your status to ensure you are being treated correctly as a contractor and not as an employee in HMRC’s perspective.
Ideally you would have an IR35 compliant contract with the following 6 factors outlined.
However, some contractors will only have a purchase order from their client which is also perfectly reasonable and possibly provides a stronger case in an IR35 dispute. Your working practices while at the client site should reflect these rules as they are the strongest evidence for your IR35 status; showing how you are actually treated while providing services.
"Your working practices while at the client site should reflect these rules as they are the strongest evidence of your IR35 status;"
Are you directly controlled or instructed by your business client? When we speak of control, you should have full autonomy in how the services are being provided.
The best example here would be when you hire a plumber. They know what must be done based on the information you have given and will not be taking instructions from you on how to fix your tap leak.
After essential information has been provided, the plumber is the expert in the situation that will carry out their services accordingly based on skills they have previously learned.
This should be the same for any contractor or freelancer claiming that they are outside of IR35. The contractor already has the skills to carry out their services and will not be instructed by the client.
Sure, the client may have some specifications but you are the expert in your field which is why you were hired as a contractor and not an employee.
One of the simplest ways to establish financial risk is having suitable business insurance for either yourself or your company. This is usually in the form of public liability, professional indemnity and employer’s liability insurance.
Of course simply having insurance doesn’t mean you're outside of IR35 but it's a good start. Having financial risk involves understanding that your company's pay is not guaranteed.
Your company or business will be responsible to rectify any errors in its own time without additional pay from the client.
If it’s the other way around where the client will simply pay you for extra time to fix defective services, then you may find yourself at risk of being caught inside IR35.
Right of Substitution
The ability to present a substitute or suitable replacement to carry out services on your behalf is an essential factor in IR35. It shows that there is no personal service where the client expects you alone to deliver work. This would show more of an employment status with the client.
Your client (either verbally or contractually) should be happy for you to send in a different worker as long as everything is completed as planned.
HMRC weighs this point more heavily in their IR35 tool so it is clearly important to at least send in a substitute on occasion to prove that the ability to do so is present.
Having a clause in your contract will help greatly but actually taking up the opportunity and sending in a substitute will solidify the point with hard evidence.
Mutuality of Obligation
Although this sounds more complicated, but it’s a simple case of not being expected to accept further contract work and equally the client is not obligated to provide further work or contracts.
An employee would always be expected to complete additional tasks and once they are done, they cannot simply go home. The employer will be expected to provide more work to their full-time employee.
A contractor on the other hand will complete the services they were hired for, and leave the site once they are done.
In some cases, the contractor will be at the site during the client’s normal operating hours but this is often due to the nature of services they provide rather than an employment status with their client.
Many guides do not consider the provision of equipment as an important IR35 rule however we know that providing your own equipment when carrying out services makes you stand out as an independent contractor or freelancer.
For example, would you expect a painter to bring their own bucket, brushes and ladders to complete the paint job for your house? Of course you would! That’s because he is operating his own business providing that he’s self-employed.
If the painter was an employee of a larger company, then the company would have provided the tools necessary for the job.
As a subcontractor for a larger company, the painter would have purchased his own tools from his own cash.
There is an important distinction here where your own equipment shows a level of independence and responsibility.
Unfortunately, the HMRC IR35 tool discounts items like phones and laptops so certain contractors in the consulting industry will be at a loss. But as long as your other points of self-employment are strong then you shouldn’t have anything to worry about.
Intention of the Parties
It’s simply expected that as a contractor, neither you or the client want or intend an employment relationship with each other.
Often there will be a couple of clauses in your contract that outlines this point in more detail. Not only that, you should also feel that your client wants only a business to business relationship with you.
If they are trying to hire you as a permanent employee after having a contracting role with them then it could put you at a higher risk of being caught inside IR35.
IR35 Public Sector Changes
Recent public sector changes mean there are no guarantees to be declared outside of the legislation even if you have sufficiently demonstrated all 6 IR35 rules.
The changes transferred the responsibility of determining your IR35 position from yourself to the public sector end-client.
This effectively means they will be liable if they get your IR35 status wrong which creates a difficult situation when most of the public sector is not proficient in IR35 legislation.
As such they would rather determine every public sector contractor as inside IR35 to minimise financial risk.
HMRC has been working to ensure there is no unfair assessment by releasing their HMRC IR35 tool which can be found here: https://www.tax.service.gov.uk/check-employment-status-for-tax/setup
The tool itself is brilliant but the issue now is the incorrect completion by public sector end clients, resulting in an ‘inside IR35’ status for most contractors.
We expect that once more high profile cases receive a proper court ruling there will be true change for the better in the public sector.
How to Avoid IR35?
This is a question that many contractors and freelancers ask themselves since receiving a £50k+ tax bill in some cases is not really in their career plans.
So how do we avoid IR35? In addition to the 6 IR35 rules above being both written in a contract and clearly represented in your daily working practices, there are several steps you can take as a precaution to ensure your risk of IR35 is as low as possible.
1. Part and Parcel is a popular standpoint where you are seen as a vital part of the client’s staff and use their facilities just like any other employee.
However we must remember that being at the client site during operating hours due to the nature of your service does not mean you will be caught inside IR35.
There should be a clear distinction between you, the contractor, and employees going about their daily tasks. You can ask yourself these questions:
• Do you have your own security clearance compared to employees?
• Are you not able to access other areas of the building because you are a contractor?
• Are you able to work from home if your type of service allows for it?
If your answer was ‘yes’ to most of those questions then you are likely not part and parcel of the client.
There’s a popular court case called MBF Design Services Limited VS HMRC in 2011 that provides many examples when making the distinction between employee and contractor.
"the contractor was sent home without pay if there were any technical difficulties with computer systems"
A very strong part of the case was where the contractor was sent home without pay if there were any technical difficulties with computer systems and they could not continue with their services.
The employees on the other hand would need to remain on site and continue with other tasks but they could expect their salary as usual.
Another substantial point was the fact there was very little notice needed for either party to terminate the contract. It’s important to take note of these in your own contracting situation.
2. You should never be asked by the client to complete tasks that are not part of the original service agreement.
Even if you would like to do so as a courtesy, the service that you provide should only be within your outlined skillset and what was agreed at the time.
Anytime a client asks for other works, there should be a new contract or amendment to the original contract to reflect the changes. It’s the most simple way to ensure that you don’t carry out services not outlined in your service agreement/contract.
3. When you are invited to staff events, you would normally be expected to pay for your own travel, food, drinks etc.
Having these paid for you by the client can negatively impact your IR35 position as it's something only employees would benefit from.
There’s nothing wrong with going to staff events for networking purposes, just ensure that you are there of your own accord and not because you’re an employee of the client.
Email yourself with details of why you are going to a certain event and who you want to meet there to further your own business.
4. Other ways to ensure your risk of IR35 is minimised is to email yourself records of any potential client meetings and lunches to show that you are seeking out other contracts while providing services to an existing client.
A solid way to prove you aren’t an employee is to have multiple contracts running concurrently to each other.
It’s highly unlikely any employer would be happy about their staff working for other companies at the same time. You are simply proving that your business is legitimate by having multiple clients.
The fact is...
If you’re a real business and treated like one by your clients, there will be very low risk of being caught inside IR35.
On the other hand if most of the 6 IR35 rules reflected that you're in an employment relationship, you should seriously consider adjusting the way you work as soon as possible.
Your chances of being caught inside IR35 would be very high if HMRC decides to investigates your business- resulting in huge financial consequences.
Don't wait until then! Take the time to understand IR35 and ensure it works for you.
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