Greater take home pay and increased working flexibility are just two benefits of a career in contracting. But if you want to capitalise on these benefits, ensuring that your contract falls outside of the IR35 legislation is of the utmost important and something you must consider carefully before you sign a contract.
But what does this all mean for a contractor? Well, in simple terms, if you are inside IR35, you should be paying your taxes at the same level as a traditional employee. If you are outside IR35, you can pay yourself by way of salary and dividends. The result of being outside IR35 – more take home pay. Knowing if you're outside IR35 – that’s an altogether more difficult question to answer.
An IR35 contract review is often a good place to start when deciding if you are inside or outside IR35. During a HMRC status enquiry, the written contract will be one of the first things that HMRC look at, so it is important to have compliant written terms in place for each and every assignment you undertake. During an enquiry, an inspector from HMRC will be looking to ascertain that you are a genuine self-employed contractor who is providing services to a client on a contractual basis. HMRC are essentially on the hunt for disguised employees, who are using their own limited company as a means of paying less tax. As a result, there are few key things that you need to ensure when checking your contract.
The first thing to check is that the contract is between two businesses as there are a few key issues to ascertain and clarify. Firstly, under no circumstances should you be personally bound to the agreement as this will likely raise questions from HMRC about personal service and whether (in reality) the client is only interested in you personally, or the services that your limited company can provide. Secondly, it is also important that you have the right to provide a substitute and that a solid substitution clause is stated within the contract. Further, this right to provide a substitute must be genuine. HMRC will often contact an end client during an investigation to see if the contractor is able to send a substitute, so ensure that the end client is aware of this and that you are both in agreement as to the terms of the contract. There should be no mutuality of obligation between the parties, so your client should not be obliged to offer work to you, nor should you be obliged to accept any work that is offered, as is the case with a contract of employment. A clause confirming this should be included in the contract. Finally, you should have control over the services provided so a control clause should be included. Clauses which indicate that you will be supervised by a line manager, or have specific start and end times should be amended or removed.
Once a compliant written contract has been agreed, you must also consider your actual working practices, as these reflect the true nature of the relationship you have with your client. If your working practices are poor, and therefore non IR35 compliant, HMRC may deem your contract caught by IR35, regardless of what the written terms say, as your working arrangements will hold more weight in an enquiry.
To put it frankly, there’s a lot of things to cover, a lot of i’s to dot and t’s to cross, and a lot of room for error. That’s why we advise having your contract reviewed by an expert to ensure you aren’t inadvertently falling foul of HMRC’s rules, and vulnerable to being found inside of IR35.
In summary and to conclude - an IR35 contract review by a specialist in this field can not only help ensure that your contract is how it needs to be, but takes a lot of stress and worry away. During an IR35 contract review, all necessary steps are taken to ensure your contract isn’t vulnerable if you are selected for an HMRC review. It’s a logical step and one you should consider taking if you haven’t already done so.