Since the implementation of the Intermediaries Legislation (IR35) in April 2000, the onus has fallen on professional contractors to prove that their contracts are not caught by the IR35 rules. In this article, we look at the role of professional IR35 contract review service providers.
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 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.
How do you show that you are not caught by IR35?
If you are selected for an HMRC status review, you will need to show that you are working in business on your own account, and are genuinely ‘self-employed’, rather than merely an ‘employee’ in disguise.
As an HMRC inspector will look at the overall picture of your contract arrangements to determine your employment status, the way you actually work in practice needs to mirror the wording of your contracts,
The best way to comply with IR35 is to make use of professional employment status experts, who can help not only with reviewing your contracts, but also provide advice on your working practices.
All professional contractors should also be able to show that they have taken ‘reasonable steps’ to ascertain their IR35 status. In fact, just being able to show that you have done so is a pointer towards ‘self-employed’ status!
If HMRC decides to make you subject to an IR35 status enquiry, not only are the terms of your contract(s) important to determining whether or not your assignment is caught by IR35, but your working arrangements (practices) must also mirror the terms written into your contract.
The importance of contract wording and working practices
- The written contract between the person supplying services to the client (a contractor in most cases) and the recruitment agency (if using an intermediary) must demonstrate that the individual is ‘self-employed’ as per the HMRC definition of the term. There are a number of IR35 factors which are taken into account – each a pointer towards self-employment.
- The written contract between the contractor and agent must also mirror the terms of the upper-level contract between the agent and the end client.
- In order to comply with IR35, it is important that the terms of the contract are acted out in the real world, and that the contractor’s working arrangements mirror the terms of the contracts.
- If practical, it is always beneficial if the client can provide you with written confirmation of your working practices.
- Having no contract in place is not helpful either, as HMRC can create a ‘hypothetical contract’ based on the working arrangements it deems to exist between the individual supplying services and the end client.
IR35 contract review services
Although your accountant may offer to review your contracts, even for a nominal fee, we would recommend using one of the dedicated professional IR35 review services that have sprung up in the 18+ years since the rules first took effect.
A contract review specialist will take your contract and analyse it for classic IR35-fail clauses, and will tell you if it is likely to demonstrate that you are inside or outside IR35.
If necessary, they will also negotiate with your recruitment agency (or end client) to include new clauses, or amend existing clauses, to strengthen your employment status position.
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 just in case you are targeted for an HMRC status review. The costs of this type of cover are very reasonable and can cover the costs of professional representation, and even the cost of paying any backdated taxes, depending on the level of cover you take out.