If you’re a contractor or freelancer, you’ve most likely heard of IR35 in some capacity. The legislation itself is far from easy to understand, which is concerning considering just how many self-employed people it’s set to effect. You need to know, as a contractor, how to bullet-proof your contract against the off-payroll rules - no mean feat with HMRC changing the application of said rules from case to case.
So how do you cover yourself in the face of an IR35 investigation?
What is IR35?
We’ve written a whole guide on what IR35 is which you can read here, but we’ll take a minute to give you a brief overview.
IR35 was designed originally to prevent the perceived tax avoidance involved when an employee switches to contracting, despite still working for the same company in essentially the same role. According to HMRC, the motivation for this move is to drastically increase a worker's take-home pay through not having to pay NI contributions or income tax.
The introduction of the legislation was rushed and unconsidered, accumulating in heavy criticism of HMRC and a distinct decline in the number of public sector contractors now available. It affected genuine contractors across the public sector, as it will the private sector, because of the poor regulations in place and no agreed application of the legislation itself.
How do I make sure I’m outside IR35?
While IR35 is apt to cause panic for many people at just its mention, there are a few basic recommendations that you can follow to stay relatively safe from an investigation.
Remember when reading this list that it’s always best to get a professional opinion on your employment status. A contract review (we offer one here) is a great place to start and is advisable even if you’re not concerned about your status.
Is it you or is it your client control that controls your work? If your client has a say in certain aspects of your working life, they could be viewed as more of an employer – placing you inside IR35.
That sounds horribly subjective and, unfortunately, it is. There are many ways that your client can have control over your day. If they have a say in your working hours – for example, dictate that you start at 9 and finish at 5 – then HMRC could argue that they're an employee. If you have a uniform, have to ask permission for time off, have a manager or supervisor that you report to or have any ‘perks’ at all, you could land on the wrong side of the legislation.
It’s crucial that contractors have autonomy over how they work. This shouldn’t be confused with project briefs though; in industries like IT and architecture, you’ll be dealing with detailed specifications for tasks, which are necessary to do your job well.
If you hired a plumber, would you care if the exact plumber you’d spoken to did the job, or would you be happy with any qualified plumber carrying out the work? The general consensus is that as long as the job gets done, it doesn’t matter who does it.
That is the right to substitution, which has long been seen as pivotal when demonstrating that a contractor is outside IR35.
The key difference is that an employee provides their personal services to an employer – i.e. they can’t send someone else to do their daily tasks if they get sick. A business, however, provides its services to a client as opposed to an individual. While any contract worth its salt will include a right to substitution clause, it’s important to keep the following in mind:
- The right to substitute must be a genuine one, otherwise, HMRC could conclude that the clause is a sham. You should be able to demonstrate how a substitute could be reasonably used in practice, even if the right is never exercised;
- The client must accept a substitute if you’re unavailable to carry out the work;
- Note down if you’ve used your right to substitute in the past – this is a strong pointer towards self-employment;
- Your company (i.e. you) should always pay for any costs relating to a substitute worker, as well as training and transportation;
- Some clients will only accept a substitute if they meet certain conditions – for example, the substitute has to be qualified for the job – which is fine, as long as they’ll accept some form of a replacement should you not be available.
Mutuality of Obligation (MOO)
Do you expect your client to give you consistent work? Perhaps you feel like you can’t turn down a job from a regular client? If there’s an ongoing obligation to provide or produce work from either side, that’s mutuality of obligation (MOO).
Most contractors and freelancers are hired on a project basis; they’ll agree to complete one job with no further expectation from either side past delivery. However, some are expected or expect to provide their services on a continuous basis. The most common red flags for MOO are if your contract includes a termination clause (i.e. having to provide notice), only having one main client (this is particularly damning if your one client has made you sign a contract to say you won’t work with anyone else while supplying your services) or having a rolling contract as opposed to a fixed length contract.
These rules can be difficult to follow for any contractor, particularly if your client is insistent on you signing a contract with any of those clauses included. It’s especially difficult to distinguish control from practicalities of the job in the public sector – locum nurses, for example – so it’s doubly important to get professional contract advice.
What happens if I’m found inside IR35?
If your contract and working practices pass IR35 tests (the most commonly used, and most criticised, being the CEST tool), congratulations – you’re officially outside IR35. This means business as usual; continue to invoice and pay yourself through your own limited company.
However, if HMRC declares that you’re actually an employee and finds you inside IR35, then your employer will be expected to deduct tax and National Insurance from your earnings.
If you fail an IR35 test, you can expect to pay around 25% more in tax every year, which would amount to a huge chunk of money absent every month. You also still wouldn’t benefit from employment rights or have a contract of employment with your client, so you could face critical financial issues with no real benefits or protections to speak of. It’s important to take the necessary precautions to avoid this situation.
As a genuine contractor, freelancer or consultant who is in business on your own account, you shouldn’t have anything to worry about. However, it would still be worth having a contract review at the very least; whilst you may know that you’re legitimate, IR35 determinations are notoriously subjective.
Should you want some peace of mind, we offer a full contract review amongst other services to help you prepare for IR35. We’ll give a pass or fail based on the current contract you hold, along with comprehensive comments on how to improve any problem areas.
We also offer IR35 tax investigation insurance (TILI) which protects against the court costs that could arise from an HRMC case. It also covers representation by our Head of Tax and resident IR35 expert Andy Vessey ATT at a tribunal.
For any further information or advice, please call us on 01163 800 400 or drop us an email.