IR35 EXPLAINED
Background
IR35 came into force throughout the UK in April 2000. The legislation has been consolidated in the Income Tax (Earnings and Pensions) Act 2003 and in the Statutory Instrument Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727.
Historically, it had been advantageous for Public Sector contractors to become the owners of a small limited companies and take advantage of dividend payments and reduced National Insurance and Tax contributions instead of paying standard contribution’s like regular employees.
CURRENT APPLICATION
Here are some points that every contractor working within the Public Sector should consider when they determine whether they can pass IR35.
Control
Start and finish times appearing in the contract | Specific days the contractor should work in the contract | Including lunch break times and duration in the contract | Specific clauses stating that the client has supervision and control over the contractor
Substitution
Another classic test of employment is whether the contractor can supply a substitute. If they genuinely can and on occasion actually do, then there is little doubt that the contract is outside IR35. But if there is no right of substitution clause, or the client clearly indicates in correspondence, such as emails or in other records, that the contractor should never even consider sending in a substitute, then the contract could very probably fail IR35.
Mutuality of obligation – ‘MOO’
Does the contract allow the contractor to take on projects from other clients simultaneously, or can the client veto other contracts? If the contract specifies exclusivity, simply states x hours a week at y rate on an ongoing basis and requires the contractor to take whatever work the client throws at them, then this indicates a ‘mutuality of obligation’ and fails IR35.
Financial risks
Regular, guaranteed weekly or monthly work specified in a contract looks more like an employee’s contract for wages rather than professional fees paid to a contractor’s service company. Ideally, a contractor should invoice when project milestones are completed. If the client requires a weekly invoice, then it should detail work completed as well as hours worked and the rate. Any mistakes in the contract must be rectified in the contractor’s own time, and the contract should say this. Guaranteed, fixed regular payments that look like a salary could make the contract fail IR35.
Equipment
Contractors often find that they are required to use the client’s equipment, possibly for safety and security reasons. This is generally not an issue that would make a contract fail IR35 if there is a sound business reason why the contractor cannot use their own equipment. However, contractors should buy their own equipment if practical and use it where possible; where relevant, they should include a contract clause that highlights this point.
Part and parcel
If a contractor becomes so integrated into the client’s organisation that they appear on telephone lists, in organisation charts, get volunteered to become fire marshal or even have staff reporting to them, then they are behaving exactly like an employee and the contract fails IR35. The contractor should distance themselves from the client’s corporate structure and only take on responsibilities not specified as part of the project in their contract when this is industry norm, such as, for example, safety responsibilities in construction or working offshore. If a contractor appears to be part and parcel of the client’s business, they can be found to be inside IR35, no matter what their contract says.
Intentions of the parties
The contract should always clarify the intentions of the contract and client, or agency. Not stating in the contract that the intentions of the client and contractor is one of supplier and customer and not employee and employer is not a definite IR35 fail, but it does not help the contractor’s case when HMRC are using the contract to prove they are inside of IR35.
How you can pass IR35
These frequent IR35 fail points demonstrate the importance of evaluating the IR35 status of every contract before you sign it. HMRC will be looking for evidence that places your contract inside IR35, so do your due diligence and make sure you don’t provide the taxman with the evidence they need to make you pay tax as a ‘disguised employee’.
FIND OUT MORE
For further guidance relating to IR35 please visit the Government Website: www.gov.uk | Call the IR35 helpline on: 0300 123 2326 | or email HMRC for assistance: ir35@hmrc.gov.uk