Through the years, we have been asked many questions by contractors about IR35, but there is one question which just keeps popping up - How important is an IR35 Contract Review?
The answer... a contract review is very important and something that every contractor should seek before signing a contract. But why is the case?
Put simply, the contractual terms form the basis of an agreement between a contractor and their client or agency. For a contractor, the contractual terms can have serious implications from an IR35 perspective, since a poorly drafted contract can leave them wide open to an IR35 challenge.
To this end, contractors are advised to properly understand their contract and to ensure that their contract is IR35 compliant, especially those who wish to operate outside of IR35. But how can this be achieved? With an IR35 Contract Review.
Volume of HMRC enquiries
Having a contract review does not guarantee immunity from enquiry. HMRC are committed to 250 new IR35 enquiries each year and any contractor can be selected. But for a contractor that has their contract reviewed, it should afford them opportunity to negotiate on the contractual terms in order to achieve IR35 compliance. Ultimately it provides assurances about their IR35 status.
Why is this important? Well, the written contract is likely to be the first thing that HMRC look at in an enquiry. Where the contractor is operating outside of IR35, HMRC will want to know how the contractor determined their IR35 status.
HMRC take a negative view of any contractor who has operated outside of IR35 without considering why. They will be interested to learn just how the contractor came to an ‘outside IR35’ decision.
In an IR35 enquiry, HMRC may even impose penalties if they feel a contractor has not exercised reasonable care during this process. This only serves to add greater significance and value to the contract review.
There are other factors to consider here. Certainly, a compliant written contract is a positive from an IR35 perspective. However, a contractor must also consider their ‘actual’ working practices. Working practices are important as they reflect the true nature of the relationship between contractor and client. If a contractor’s working practices are poor, and therefore non IR35 compliant, HMRC may deem the engagement caught by IR35, regardless of what the written terms say. So, if a compliant written contract is in place, it is vital that working practices closely mirror it - HMRC will deem the contract worthless otherwise.
To safeguard their position, contractors should ask their client to confirm and agree their working practices, using a Confirmation of Arrangements document. This document is essentially a statement which details the true nature of a contractors working practices. It is designed to remove contract ambiguity and used as positive evidence in the event of an IR35 enquiry.
A Confirmation of Arrangements document may even help accelerate an enquiry. This saves the contractor from the hassle and stress of a long drawn out process, instead allowing them to do what they do best – contracting.
So, there you have it – a contract review is really quite important. The recent victory for HMRC against BBC presenter Christa Ackroyd shows what can be at stake. For a relatively small cost, you can ensure IR35 compliance and potentially save yourself thousands of pounds in IR35 liabilities, interest and penalties further down the line.
So what do I need to do?
To summarise, this is what we recommend.
- Have your contract reviewed before it is signed.
- Make sure your working practices are sound and closely mirror your IR35 compliant written contract.
- Ask your client to sign a Confirmation of Arrangements document.
- Look at buying IR35 Insurance.
For further enquiries, call us on 0116 380 0400 or visit our website; www.larsenhowie.co.uk