IR35 Rules

If you have read our IR35 guide, you will know the importance of getting your contract properly reviewed and you will understand the potential financial implications of being deemed Inside IR35. Remember, HMRC will look for any reason to deem a contract Inside IR35, so a simple error in a contract could be costly. Always discuss a contract’s IR35 status with your accountant and seek professional advice if the situation isn’t cut-and-dry.

Here are ten points that HMRC will consider when looking at a contract. In all situations, where the contract says one thing but the contractor’s working practices are different, the actual working practices will overrule the contract.

Client and Sector

Tightening of IR35 rules in April 2017 mean that, in practice, all public sector work is held to be Inside IR35. If any company has previously failed an IR35 ruling, HMRC can deem all future contracts with the company to be Inside IR35. Watch out! These roles may be re-advertised in a different way to disguise the fact that they are within IR35.

Contract Creation

If a contract is based on a permanent contract, cobbled together from various sources or not written for the contractor’s specific engagement, HMRC are unlikely to look favourably on it. If the contractor needs to draft the contract themselves, it’s prudent to take specialist legal advice.

Control

Is the contractor controlled by the client? Or can the client determine the manner in which the work is done, processes to be followed, priority of tasks or where the contractor completes their work?

Substitution

Can the contractor send somebody else to do the work for them? If the requirement is that the individual completes the work and there is no right to substitution, the contract may fall Inside IR35.

Mutuality of Obligation

Is the client required to give the contractor work and is the contractor required to accept it? Is the contractor free to take other jobs simultaneous to the contract, or can the client veto other contracts? Is the contractor guaranteed a certain number of hours or days’ work? These are key indicators of ‘disguised employment’ and could fall foul of IR35.

Equipment & Materials

Is the contractor able to use their own equipment or are they required to use the client’s equipment? There can often be sensible security and safety reasons for this, however, in conjunction with other factors, this could be used as evidence a contract is within IR35.

Lack of Financial Risk

If the contract defines a set rate and working hours, without strict definitions of what needs to be achieved within these timeframes, the contractor could be deemed not to be taking a financial risk. This appears much more like employment than a true contractor relationship.

Payment Schedule

If equal payments are guaranteed regularly, they will look much more like a salary than contract payments. Preferably, contractors would invoice when project milestones are reached. Failing this, invoices should detail work done and progress made towards milestones, otherwise it would be difficult to claim the relationship is not ‘disguised employment’.

‘Part and Parcel’

If the contractor becomes integrated into the client’s organisation, particularly within management, they can be deemed a disguised employee no matter what the contract says. Warning signs include having business cards, holding and attending meetings, having staff report to them, use of regular staff facilities and appearing on telephone lists.

Intentions of the Parties

To safeguard against IR35, any contract should clearly state that the client intends to engage the contractor on a supplier basis. Omitting this can leave a contractor undefended against IR35 investigations.

An IR35 investigation will rarely focus on one or two points above. Instead, the entire contract, plus the contractor’s working practices, will be taken into consideration. Although you can guard yourself against an IR35 investigation by carefully reviewing all contracts, there is no amount of clever wording in a contract than can guarantee you against being caught by IR35.

If you have any questions about your own IR35 status, or for advice on whether a contract may fall inside or outside IR35, please call us on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.