What is IR35?
IR35 legislation applies to individuals who supply their services to the clients via their own limited company also known as personal service company (PSC). The legislation states that any contractor that is a disguised employee should be subject to the same Income tax and National Insurance Contribution as other normal employees and not be able to access tax benefits which are available to contractors working via their own limited company.
IR35 applies where the relationship between the end client and the worker is of employer and employee. However it does not apply if the relationship between the client and the worker is one of self-employment. To ensure you don’t fall inside IR35 it is important to structure the relationship.
As a contractor, your IR35 status determines the tax position with HMRC. Contractors working through limited company, who fall Inside IR35 are paid on PAYE basis, and those who fall Outside IR35 receive payments in the form of dividends.
There is no way to avoid IR35 if working as a limited company, and you draw dividends from the company's profits. But there are ways of ensuring compliance with IR35. Here are 10 steps to avoid getting caught by HMRC and to avoid IR35:
10 Steps to Reduce IR35 Risks
1. Don’t attract attention from HMRC:
- Don’t delay tax returns:
Filing tax returns after the deadline will attract the attention of HMRC and make them suspicious of you making further mistakes. So, try not to submit tax returns lately and avoid any errors.
- Get help of an Accountant:
Hiring an accountant will reduce your chance of errors and timely filing of tax returns would help to avoid such situations.
2. Do not ask permission to take a leave:
Contractors must be careful how they take sick leave or paid leave. Informing the client in advance that you will not be available on the particular day is professionalism and the client can plan for your absence. You should never take permission to for sick pay or holiday and get paid for the leaves as this may depict that you are controlled by your client and receiving the benefits how employee receives. This may put you inside IR35.
3. Pay for a contract review:
There is no such thing as a IR35 proof contact, but paying for a contact review is important. After you receive a contract, get it reviewed by an expert to avoid IR35 as the expert can identify the wrongly written clause and that might put you inside IR35.
4. Ensure your name is not present in the contract:
Make sure your name is not present in the contract, as this could mean you are providing services personally and you will fall inside IR35. It should be clear that you are providing ‘contract of services’ as a business to business service provider.
5. Secure a ‘confirmation of arrangements’:
Technically, your contract would provide that you are Outside IR35 but it might not be the case always. Ask your end client for the “confirmation of arrangements' so that it is clear your working relationship with the end client is business to business.
6. Keep a contract record:
If you come in the eyes of the taxman, HMRC may conduct an investigation of your past contracts. You must keep records such as telephone logs, mail copies so that you have proof to show to the taxman when he comes banging your door.
7. Make sure you are not controlled:
HMRC uses some key test to determine you are a “disguised employee’ and fall inside IR35. Control is one of its principles, so don’t let your client control you. Before agreeing on the contract with your client make sure that you are in control of where, what, when and how the work is carried out. Only carry out the task you are hired to do and what is mentioned in the contract. Don’t let your client instruct you and move you from work to work.
8. Avoid “Mutuality of Obligation.”:
This is another test to determine employment and IR35 status. MOO means that an employer is obliged to provide work and a worker is obliged to accept the work.
You must ensure that your contract gives you freedom to refuse work so that you can take alternative work.
- Keep Evidence:
If you have refused work from your client. Keep an evidence of the same- this also demonstrates a lack of MOO.
9. Keep safe distance with Client:
Don't get any appraisal from your client. As appraisals are for employees and not contracts. Otherwise this will suggest that you are part and parcel of the client’s organisation. HMRC will infer that you are a ‘disguised employee’ and thus fall inside IR35. Also, don’t use staff facilities like canteens, gyms or staff parking. Just behave like a visitor- a visitor contractor and sign in everyday. So, keep an arm distance with client and don’t take any appraisals.
10. Secure a right of substitution and exercise it if possible:
Substitution is also called “IR35 Silver bullet”. If you send a substitute to provide the same service, it proves that you are not providing a personal service and therefore you cannot possible be an employee. So make sure there is right of substitution clause in your contract.
Alfred is invited for a Christmas Party which is for the employees and company staff. As he has built good working relations with the client, for nice gesture Alfred decides to go to the party. Now this is showing that Alfred is one of them and part of the organisation. This seems nice to be part of a company but the taxman will see this as a ‘disguised employee’ and put you inside IR35. The tip to avoid the IR35 risk is to make sure there are strong indicators of self-employment to outweigh this.
It is convenient to comply with the wishes of the client but at the same time it can pose IR35 risk. In unavoidable situations, try balancing with strong indicators of self-employment.
From 6th April 2020, many contractors working will be affected by the off-payroll as the responsibility of determining IR35 status will shift from their PSC to the end client. Contractors are advised to speak to their agency or client to find out what action they are taking to comply with the new rules.