Suppose HMRC claims that you are inside IR35 on a given contract? You can probably fight it, and HMRC does loose many of these cases. But in case you can't, you'll have to pay back tax, national insurance contributions, and interest and penalties on your earnings. The financial impact of IR35 is massive for contractors, and this is something you really want to avoid.
You pay expenses and extra tax
Paradoxically, you will be paying all this tax without ever having received any of the benefits that employees get. No holiday pay. No sickness benefit. No 'personal days.' You are expected to take care of all your insurances yourself. You pay a much greater part of your own expenses than do employees.
And when HMRC comes calling six years after you had the contract--for the review period is a full six years long--you will have spent all that extra money, but you'll still have to pay the same tax as employees who didn't have to.
Can you claim rights?
Now, suppose you wanted to claim employee rights, which is done on a regular basis through the Employment Appeals Tribunal (EAT). You want to take your case to court and get all those benefits that you've missed out on?
''You'd be out of luck,'' says Theresa Mimnagh, a lawyer (senior consultant) with the Hove-based legal consultancy Lawspeed which specialises in recruitment and contractor affairs. "You can only go to the Employment Appeals Tribunal within three months of the end of your contract to demand employee rights but HMRC can wait six years to claim that you are actually within IR35."
Bear in mind that a case with the Employment Appeals Tribunal may take two to three years to decide. And while you don't actually need a lawyer to go before the Tribunal, you probably don't have much chance without one in this complicated area of legislation. So you have to decide right after your contract is up if you intend to make this effort or not.
How did this happen?
This brutal absurdity came about because the Government never completed the IR35 legislation as it promised to. As Bill Dodwell, a tax consultant with the London-based firm Deloitte points out, the legislation on IR35 was never completed. ''The Government promised to see that those found inside IR35 would also get employee rights, but somehow never got around to it. They simply never completed the proposed package.''
And there is no formal mechanism in the UK to contest an institutionalised legal contradiction of this kind, that is where one part of the Code contradicts another part of the Code--in this case where Employment Law conflicts with Tax Law.
Employment Law Status
So should contractors who fear they may be inside IR35 go right to the Tribunal?
It's not really that simple, because proving an implied contract of employment is no easy thing to do. The case law is the same as that for proving IR35 status, and even HMRC with all its resources rarely succeeds in doing that.
The Employment Appeals Tribunal is very sympathetic and fair to workers who make these claims. But the judges will expect you to prove that you weren't really working on a self employed basis and were infact working directly for the client like an employee.
In a 2006 judgement called James v. Greenwich, the Tribunal ruled that there must be a clear relationship between the client and the contractor, one which supersedes that between the agency and the contractor. That case pretty much scuppered the chances of a contractor caught by IR35 claiming employment rights from their client.
Without going into the legal technicalities, you can see that this is something that you will want perfectly clear before you go to the expense of taking your case to the Tribunal. Ironically though, this can and has been used as a tactic by a contractor who was being investigated for IR35 shortly after their contract finished. They took their client to Tribunal, knowing they had little chance of success, didn't win, and then used that result to get the IR35 investigation closed down.
Bear in mind though that HMRC doesn't have to jump through lots of legal hoops at first. The tax inspector will claim that IR35 should apply to you, and then it's up to you to fight it out in court to prove the contrary.
Yes, it's brutally unfair, and historically the Government has made no plans to make the necessary changes. However, this topic was addressed in the 2017 report by Matthew Taylor who indicated that those who were judged in tax law as an employee should get all the rights associated with employment, and vice-versa.