Introduction
Being caught by IR35 could cost you thousands of pounds, and thus the process of IR35 contract review before signing a contract is of paramount importance.
You can find out how much IR35 could cost you using the IR35 Calculator.
As a contractor, you can evaluate your IR35 status for free by using the online IR35 test on ContractorCalculator.
Whilst the written contract is the most important factor for IR35 compliance, there are other IR35 criteria that are often overlooked.
This article discusses the ir35 criteria to consider, based on IR35 case law, when determining if a contract is that of a self-employed nature or that of “a disguised employee”.
Failure to address these points will leave you open to a Revenue investigation.
Seek professional advice
..the written contract is the most important factor for IR35 compliance...
IR35 is a very complex subject. Some self review is useful, but it is advisable to seek advice from an expert in IR35 when reviewing your position.
Point 1: Background
The background factors that could affect your IR5 status:
- What is the background for obtaining the work?
- Did the job advertisement want a self-employed contractor or an employee?
- Are you replacing an employee? When replacing an employee, it’s likely you’ll be expected to be an ‘employee’ also.
Check if you are replacing an employee or another contractor before you start.
Point 2: Previous Status Ruling
Has there been a previous ruling by HMRC?
They may have previously decided the work is that of an employee and not a self-employed contractor.
You may not be aware this decision has already been made and even if you ask the client they may not tell you due to confidential reasons.
Although these first two points do not relate directly to a contract, these points could mean that your contract may not pass a challenge from the Revenue.
Point 3: Contract
This is one of the most important considerations in determining a contractor’s status.
Unless you have sought professional advice in preparing the contract you could be at risk from IR35.
Unless you have sought professional advice in preparing the contract, you could be at risk from IR35.
A genuine contract is based on the individual conditions that you will work to. If you have been given a contract by an agency or copied a contract from someone else then you could be in danger from a Revenue review.
Revenue auditors will try to discredit a contract if they feel it isn’t a genuine contract. This can be done by selecting a clause in the contract; say for example a substitution clause and asking for evidence is has been invoked. Often it hasn’t been invoked, so it is easy to imply that the contract isn’t genuine and the clauses have been copied from elsewhere. All the clauses must be genuine and you must be prepared to argue with the Revenue that they are.
Point 4: Mutuality of Obligation
The mutuality of Obligation is important, and any contract should include this point.
You should consider what would happen if you were offered work elsewhere. Would you be able to leave the present client and go and work elsewhere at the same time, or would the present client object?
If your contract allows you to work elsewhere at the same time then this is a pointer towards self-employment.
If the client refuses to let you work elsewhere then this points towards an employee. If there is no clause in the contract, then you should include one as a matter of urgency.
Point 5: Control
If the client has control over your working conditions, it’s more likely you will be classed as an employee. Thus, the contract should not have any control.
Clauses to avoid are:
- Time you start and finish each day
- Days you are expected to work
- Times you can take your lunch.
These are pointers towards employment.
Any contractor who wants to be outside IR35 will need to ensure they can organise their work and the days they work rather than the client.
Point 6: Substitution
You should ensure there is a clause in the contract allowing you to send a substitute if you are unable or unwilling to work at any time.
This must be a realistic clause, so you should ensure you know of a number of other contractors who are skilled enough to undertake the work for you, if you are unable to work the contract yourself.
If you have no substitute arranged, the Revenue will assume you are “a disguised employee”.
Point 7: Financial Risks
If your contract allows you to be paid the same amount per month from the same client then it can give the impression that you are paid similar to an employee.
A self-employed contractor is more likely to be paid on an irregular basis on production of an invoice when certain stages of the project work are completed.
Regular monthly payments often indicate employment.
Point 8: Equipment
If the contract stipulates that all the equipment is to be provided by the client, then the Revenue often argue that the contractor is a disguised employee.
This is not one of the main pointers generally in arguments with the Revenue.
There are many tax cases which disprove this point, but it is a good idea to ensure that there is a clause regarding equipment and if there is a clause confirming what equipment you will provide.
Point 9: Part & Parcel of the Organisation
This term relates to whether the contractor has spent so much time at the client that they are integrated into their business. You will need to ensure that you are not considered part of the client’s business.
You should have your own business cards and not be shown in the client telephone directory.
You should not be part of the management team and there should be no reporting on staff.
In effect, you need to distance yourself from the client and not appear to be integrated into the client business.
Point 10: Intentions of the Parties
It is worth making it very clear in any contract, that the agreement is one of client and contractor, not of employer and employee.
Conclusion
These points are important to ensure that your contract allows you to work outside IR35 and continue to receive your fees without any heavy deductions.
Failure to address these IR35 criteria in any contract will leave you open to a Revenue investigation and maybe all future payments being liable to income tax and National Insurance before you receive your fees. Investigations are costly in both time and money. You can buy IR35 insurance, and there are very levels. Check our guide on IR35 tax investigation cover to find out more.