What's my IR35 status? A common scenario is that you’ve found the perfect contract, with the perfect client, your agency has sent you the written terms and conditions, which they have asked you to sign. Everything seems fine and then, suddenly, you remember about that tax legislation called IR35.
Filled with anxiety, you start to panic, unsure what to do next. You start to question yourself. Not wanting to risk losing the role, do you just sign the contract, largely ignoring IR35 all together? Or do you seek the advice of an IR35 expert to better understand your IR35 position?
This scenario sound familiar? For many contractors, it certainly will do. With IR35 having such an effect on contractors at this current time, it's a topic that one simply cannot ignore. A basic knowledge of IR35 is important, but knowing whether your contract falls inside or outside of IR35 is vital. Failure to do this and to make to necessary provisions in respect of IR35 could be catastrophic to your business further down the line.
What is IR35?
So, what exactly is IR35? In a nutshell, it is a tax legislation which affects contractors operating via their own limited company or limited liability partnership. The legislation was first introduced in April 2000 as a measure designed to counter tax avoidance by contractors who HMRC consider disguised employees. The impact of being inside of IR35 can be financially significant, with some commentators estimating a 20% take-home pay reduction, due largely to the fact that the contractor will be taxed in the same way as a traditional employee.
This contrasts sharply with a contractor operating outside of IR35, who is able to collect their fee income by a combination of a low salary and then dividends, which is much more tax efficient. It is therefore within the contractor’s interests to work outside of IR35. But how can you do that successfully?
An IR35 Contract Review
The first thing to consider is an IR35 review of your written contract from an independent firm of experts. An IR35 contract review is relatively inexpensive to buy, and will provide that all important status opinion of your contract. If the contract is considered inside and therefore caught by IR35, the review report will usually recommend changes to make the contract compliant. This will give you the information you need to be able to discuss changes with your agent. Hopefully, agency negotiations will be quick and pain free – most agents will want the contract signed and sealed quickly, so they will usually be accommodating in regards to proposed changes so that they can get the terms agreed. Once this has happened, you can comfortably sign the contract, in the knowledge that the written terms are as strong as they can be and importantly, falling outside of IR35.
Consider your Working Practices
The next thing to consider are your actual working practices. During an IR35 enquiry, HMRC are unlikely to take the written contract at face value, instead seeking to establish the true facts behind the contract and how the services are provided in reality. This makes your working practices vital within this context, and key to your IR35 status. To this end, it is important that you understand how HMRC determine status and the key factors they will look at when making their decisions.
So how do HMRC come to an IR35 status decision. The unfortunate truth is, there are various factors that HMRC will consider. However, it is generally accepted that the main tests are:
- Whether or not you have the right to provide a substitute?
- How much control you have over the services provided and how much control the client exercises over you?
- If there is a mutuality of obligation between the parties to offer and accept work?
The other factors which have a bearing on IR35 status include; your exposure to financial risk, how much equipment you provide and whether you are considered part and parcel of your clients organisation. Other more minor factors will play a part as well.
HMRC will apply these tests in an IR35 enquiry when coming to a status decision. It is therefore imperative that you understand them, how they affect you, and how you should be working in your contract to stay IR35 compliant. Failure to do so could be problematic, especially if you are subject to an IR35 enquiry.
Confirmation of Arrangements document
At this stage, you may wish to put a confirmation of arrangements document together. A confirmation of arrangements document is a statement which details your working arrangements when providing services to your end client. It should be signed by your client, to be used as part of your IR35 defence. Some clients will be reluctant to sign them, scared of future legal ramifications if they do so. Should this happen, all you can do is explain that the document is not legally binding and will be used to support the argument that you are operating outside of IR35.
Equally, a confirmation of arrangements document should only be used if it shows you being outside of IR35. For obvious reasons, a statement confirming client control and no right of substitution is unlikely to be of any benefit.
HMRC is committed to 250 new IR35 enquiries each year, so selection for enquiry is always possible. As such, IR35 Tax Investigation Insurance is a vital defence tool and will afford you access to professional representation. This will give you the best possible chance of a successful outcome in an IR35 enquiry. Remember, your accountant may not be familiar with employment status to the same level as an IR35 expert.
What’s more, your insurance usually covers all representation costs, subject to the usual policy terms and conditions. Therefore, the provision of IR35 Tax Investigation Insurance is one to consider closely.
So, there it is – understanding your IR35 position and the steps you should take to best protect yourself. To summarise, we recommend the following:
- Take time to understand the basics of the IR35 legislation
- Have your contract reviewed by an expert before you sign it
- Assess your working practices, changing the way you provide services accordingly to ensure IR35 best practice
- Put a confirmation of arrangements document in place, signed by your client
- Take out IR35 Tax Investigation Insurance.
By doing a little, you can save a lot, and prevent yourself from becoming an IR35 enquiry statistic.