To ensure that any contracts you undertake are not deemed inside IR35, you need to be able to demonstrate that you are not a disguised employee, but truly working in the manner of a small business owner. In other words, can you show that you are ‘in business on your own account’?
What if you need to prove to HMRC, or a client, that you are truly ‘self-employed’, rather than a traditional employee in all but name?
We asked Seb Maley, CEO of IR35 specialists Qdos what type of pointers (both written and in practice) would help to achieve this.
The term ‘evidence’ itself can be slightly misleading given the following doesn’t usually set or overturn an IR35 decision alone. Nonetheless, it’s important to gather anything that points towards a contractor being in business alone.
This could be:
- Company stationery
- Having a business website
- Your own office address
- Having more than one client
- Investing in and using your own equipment, not the client’s
Exercising your right to substitute
Having the written right to provide a substitute is a key pointer towards self-employment, but actually exercising that right is perhaps even more important should HMRC decide to investigate.
It often shows – although it’s not always decisive – that a Personal Service isn’t delivered by the contractor, who can substitute in another qualified individual as and when they need to, much like any other business providing their services to another business.
Saying ‘no’ to work
Saying ‘no’ to any significant work that sits outside the terms of the contract is also a powerful indicator of self-employment.
By MOO, we mean there is no obligation for the client to provide paid work and for the contractor to accept this.
Undertaking additional work outside the contract
Suggesting, completing and invoicing for additional work that sits outside the terms of an initial contract is also important.
Much like turning down work, it suggests a contractor is not under direct control to complete all work and that MOO isn’t present.
Not being tied to the office or the client’s working hours
Increasingly, employees work remotely, so working from home won’t necessarily demonstrate that a contractor belongs outside IR35 on its own.
That said, a contractor working from their own ‘business premises’ (whether that’s from home or elsewhere), and outside the client’s typical working hours, are all factors that together start to build a picture of self-employment and not employment.
Demonstrating ‘financial risk’
Because many contractors, particularly those in IT, are knowledge workers, heavy investment in equipment other than technology isn’t usually required – aside from laptops and computer software.
But contractors might want to show – if required – that they pay for a business landline, internet, mobile phone costs, along with any marketing, training and business insurance.
In addition to this, any mistakes made by a contractor should be rectified in their own time, and not the clients.
This should be written into the contract to show the contractor is taking on financial risk, just like any other business would when delivering its services.
IR35 contract review
An IR35 contract review carried out by an independent and unbiased expert is important when strengthening any claim for working outside the legislation.
And while in most cases it is now the responsibility of the end-client to determine IR35 status, many contractors continue to have their contract examined by an IR35 specialist, whether to check their client’s decision or to support any challenge made to overturn what they see as an incorrect inside IR35 determination.
Working practices review
Over time, a working arrangement might well evolve and the service provided begin to differ from the initial contract. This can have an impact on IR35 status. In addition to businesses regularly reviewing contractors’ working practices, contractors may also want to have these checked given the significant financial implications of working inside or outside the legislation.
In the event of an enquiry, the working practices will often hold more weight than the written agreement. This is because the working practices are considered to better reflect the reality of an engagement.
Confirmation of arrangements
A ‘CoA’ letter or document can be a vital piece of evidence in an IR35 enquiry.
It shows that a contractor, a client and parties in the supply chain completely agree on IR35 status, and is most relevant for contractors who maintain the responsibility for determining IR35, such as those engaged by a small company.
Read this article for further information and to download a CoA template.
A start and an end date
Project-based work, as opposed to an ongoing, rolling agreement, can also be a useful pointer towards self-employment. Start and end dates suggest a contractor is providing a contract for services and not employment.