Do you have a question about IR35

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So you’ve heard about IR35, but never really fully understood what it is, how it affects you and how do you know if you’re inside or outside of IR35? This article is going to explore all the different aspects which make up IR35 and by the end of this you should have a good idea if IR35 affects you or not.

What is IR35?

IR35 is HMRC’s way of countering tax avoidance by people who disguise their employment. In the past it was very common for people to finish their employed positions on a Friday and then return back on a Monday, to the same company doing the same job but as a contractor. This means that the contractor can now take home more money if they are using a limited company or partnership as their payment vehicle.

By using a limited company or partnership contractors are able to reduce the amount of Income tax and National insurance they paid. As you’d expect HMRC aren’t very happy about this and IR35 was introduced to try and stop people from going out contracting when they should be employees.

In 2012 the Business Enquity Test was introduced to try a define what risk level you are at with IR35. What this test set out to do is to paint a picture of the contractors company and help clarify to the business owner what HMRC defines as a Proper company and what areas need to be improved on, so not to be affected by IR35.

To test your exposure to IR35 visit our interactive guide to IR35

Substitution

Substitution or the Right of Substitutions means that the contractor has the right to send an replacement with the same skillset to perform the contracted task. If your contract states that replacements are able to be sent then your personal service is not required and will almost always stop any IR35 challenge by HMRC.

It’s important that you the contractor has the control over the Substitution, the client shouldn’t be able to refuse the replacement that is sent.

It’s important that the contract states than any expense incurred in providing a substitute it will be paid by the company not the client.

What HMRC likes to see is companies who need to bring in contractors are doing for the skills not the person.

Control

Contractor are brought in by companies because of their expertise in a particular field, so very few contractors will be told how to perform their tasks.

You should try to make it clear in the contract that most of the decisions related to your task are yours to make as long as they don’t affect the final deliverable.

If you are unsure of issue of control think of the “what, when, where and how”

  • What work your client tells you to perform
  • Where your client tells you to work
  • When your client tell you to work
  • How you should you do the work

You should try to make sure you are in control of most of these aspects.

Mutuality of Obligation

While Mutuality of Obligation or MOO as it’s know, is one of the key tests in defining your IR35 status very few contractors will be affect by it. because usually after a contract has finished there is rarely any obligation by the client to offer a new contract or for a contractor to feel obliged to accept the contract that the client is offering.

While not many of you will be affected by MOO it’s important to make sure that your contract reflexes that you have the right to refuse further work from the client. That you are able to pick and choose your projects and it is never expected that you just turn up to the client office to perform given tasks

Financial Risk

When an employee make a mistake generally they are not expected to reimburse the company for the mistake or be expected to work for free to rectify the mistake. This is not the case for a contractor. If you make a mistake as a contractor you should be expect to fixed the problem at your own cost, provide extra resources to get the project back on track or see your contract terminated earlier and not been able to collect the full fee.

While this example is at the extreme level and I hope none of you will ever have to go through a situation like it, there are many other ways to show Financial Risk if you get a knock on the door from HMRC.

  • Invoicing for work you’ve completed
  • situations where you’ve had to negotiated on price
  • Receipts for stock or supplies
  • any bad debts you’ve had to suffer
  • Project that didn’t turn a profit
  • Projects that you made more profit than expect due to you completed the work early.

The final tip is to make sure that your contract has a fixed price and for the work and approximate date of completion.

Part and Parcel

Its normal for people to want to fit in when starting at a new company. You want to be part of the team feel you belong at the company but in the eyes of HMRC contractors aren’t able to do this.

While many judges consider Part and Parcel to be a ridiculous measure of employment status, it important to avoid looking like a employee. It can be very hard to distinguish the difference between contractor and a permanent employees and the conveniences that companies offer to make you feel at home could be the very things that bring you to the attention of HMRC inspectors.

Somethings to avoid when contracting

  • Don’t use transport provided by the company or carpool with employees
  • Don’t accept the free lunch thats on offer or use the company canteen
  • Don’t accept your Christmas party invitation
  • Make sure you sign in everyday instead of using a pass
  • Only use your own business card not the company ones
  • Make sure you aren’t a first aider or fire warden

Provision of Equipment

The Provision of Equipment test can be very difficult for many contractors. If you think of a IT contractor they are going to be expected to use the clients equipment and network. A oil contractor will use the tools that are on the rig and not bring their own.

Unfortunately this bring up a number of complications with IR35.

  1. By using the client’s equipment you are part and parcel of the business
  2. There is no financial risk taken by the contractor in investing in equipment
  3. You are being controlled by the client

It’s recommended that contractors purchase equipment which are related to area of contracting you may not have to use them but at least you can show you have them. Another way is to develop some tools that will help you in your area of contracting.

Business Status

HMRC likes to see you are in business on your own account (IBOYOA) now there are a number of ways you can demonstrate this and most of them are related to marketing. Which makes sense as real business market themselves to generate more clients.

So its important to have the following to show HMRC that you mean business

  • Have a professional looking website
  • Get business cards, letterheads and other stationery made
  • Create and use social networks with your company name
  • Have listings in local and niche based directories
  • Try to get some mentions is local press or trade press
  • Do work which is outside of your main contract
  • Host open days, networking events or sponsor them
  • Have a business phone number

You may be reluctant to have all of these due to the cost involved but it pales in comparison to the expense of being caught by IR35.