Despite recent changes to IR35, which in most cases means contractors’ clients are tasked with assessing IR35 status, it remains in a contractor’s best interests to ensure their compliance and that the service they provide is genuinely outside of IR35.
In this article, we focus on the continued importance of professional IR35 contract reviews, which prove vital in checking the accuracy of client determinations and even overturning wrongful assessments.
What happens if you are caught by IR35?
IR35 is aimed at people who provide services via their own limited companies, but whose working practices and written contracts imply that they are merely ‘disguised employees’.
If your contract work is deemed to be caught by IR35 (because the way you work appears to be more like an employed person than someone genuinely in business on their own account), your entire income for that contract will be subject to standard income tax and National Insurance Contributions, rather than the more tax advantageous route of small salary and large dividends favoured by most limited company directors.
Try our IR35 tax calculator to assess the full impact on your take home pay.
As a result, it is in the best interests of all professional contractors to be able to demonstrate that their contracts fall outside IR35, particularly given that the only scenario in which contractors now set their own status is when they are engaged by a small private sector company.
How do you show that you are not caught by IR35?
Following IR35 reform in both the public and private sectors, contractors need to be able to demonstrate to their client that their engagement belongs outside IR35 – in other words, that they provide their services as a genuine business, rather than as a disguised employee.
Until 2017 in the public sector and 2021 in the private sector, contractors’ focus was on being able to show HMRC that their contract sat outside IR35. Since reform, it’s arguably about demonstrating to a client that this is the case.
Having an independent IR35 expert review the contract itself along with working practices is a smart first step. Providing objective advice – along with recommendations to strengthen outside IR35 status – often proves vital in demonstrating to a business that an engagement sits outside the rules.
Given the complex and ambiguous nature of the IR35 legislation, doing this without the support of a specialist is a risk, while the opinion of a trusted and independent expert carries more weight.
And be mindful of HMRC’s IR35 tool, CEST, when self-assessing IR35 status. The tool has a number of fundamental flaws, is not fully aligned with IR35 case law and has even been overlooked in court, which is when it really matters.
Even if CEST was to deem a contract outside IR35, for best practice and to ensure accuracy, results should be checked by a specialist.
The importance of contract wording and working practices
Another thing to bear in mind is the difference or potential differences between the contract itself and the working practices. While the contractual terms outline the agreement, the working practices reflect the reality of the engagement – in other words, how the service is delivered day in day out.
To ensure IR35 compliance, and for contractors to demonstrate outside IR35 status to clients and even HMRC if approached, it’s crucial that the contract mirrors the working practices. This is because working practices carry more weight in an IR35 enquiry given they show the reality of the situation.
No contract? Not an excuse.
Not having a contract in place with a client isn’t an excuse either – nor will it serve as a workaround to IR35.
When enquiring into IR35 status, HMRC will look at the ‘hypothetical contract’, which is based on the working arrangements deemed to exist between the contractor and the end client.
IR35 contract review services
To recap, while IR35 reform has transferred the IR35 burden to businesses in all but one scenario, IR35 contract reviews remain a valuable service to contractors.
They can be used to demonstrate outside IR35 status to a client and to support any challenge put forward, when looking to overturn an IR35 decision.
In an IR35 contract review, an expert will carry out a rigorous analysis of a contract, focusing on all aspects of the IR35 legislation, before providing a detailed report detailing the outcome.
If a contract is deemed as inside IR35, a specialist, such as Qdos, will recommend changes to clauses – which must also be reflected in the working practices – that would support outside, rather than inside, IR35 status.
Qdos Contractor – For a fixed fee (currently £125 + VAT), they will analyse your contract, tell you which clauses are likely to pass or fail, and analyse your working practices as well.
Qdos can also liaise with any third parties to implement changes to the contract if it ‘fails’. Other levels of service are also available.
You can also take out IR35 insurance protection in the event that HMRC investigates completed contracts, held prior to the introduction of IR35 reform.
The costs of this type of insurance are very reasonable and can cover the costs of professional representation, along with the cost of paying any backdated taxes, depending on your level of cover.