Contractors are using ContractorCalculator’s online IR35 Test to “find and fix” everyday IR35 challenges, says Seb Maley of Qdos Consulting. The free test highlights areas where contractors’ working practices or contracts might need tightening up to avoid the unwelcome attentions of an HMRC status enquiry.
According to Maley, whose firm advised ContractorCalculator on the development of the IR35 Test, the contract is always the first port of call when assessing IR35 risk. But he emphasises that working practices must always reflect what’s in the contract, or the document is meaningless.
“Most contractors who fail ContractorCalculator’s online IR35 Test are on the borderline between a pass and a fail simply because there is an inappropriate clause in their contracts,” explains Maley. “By renegotiating the contract and confirming the actual working relationship with the end-client, most contractors will be well outside of IR35.”
Right of substitution is poorly understood
The most common cause of failing ContractorCalculator’s online IR35 Test is on substitution which, as Maley explains, is because many contractors and clients don’t fully understand what it means.
“When a contractor is asked ‘can someone be sent in your place?’, they can get quite indignant because they believe they’ve been hired because of their unique skill-set,” says Maley. “Equally, a client might respond by saying that they’ve hired a specific contractor, but don’t realise they’ve hired a service provider, not an employee.”
The key to resolving this is for both contractors and clients to better understand that the contractor’s limited company is supplying skills, and that as long as those same skills are available it should not matter who supplies them.
Highly skilled and expert contractors are not controlled
“Control as an employment status indicator is all about how the work is done, or what’s known as ‘the method of work’,” continues Maley. “Highly skilled white collar contractors are not typically told by their clients how to undertake their contracts, so most contractors pass the control section of the IR35 Test.
By renegotiating the contract and confirming the actual working relationship with the end-client, most contractors will be well outside of IR35
Seb Maley, Qdos Consulting
“It’s when contractors are performing more generic tasks, such as working on a helpdesk where the method of work is controlled, that they would fail a control test,” he adds. But the majority of contractors, over 70%, easily pass the control element of the IR35 Test.
Although HMRC might latch onto location and hours as indicators of control and therefore disguised employment, Maley explains that there is a simple and compelling explanation: “We routinely instruct contractors to record that they have to work on the client’s site and within the client’s core hours because of security reasons, and because that’s the only time when the contractor can work with other project team members.”
Maley warns that problems will arise if the contract includes clauses such as dictating lunch hours: “When reviewing a contract we tell contractors exactly what clause must be changed and the specific wording to replace them with. A contract specifying a typical professional working day of 08:30-17:00 is OK if that’s when the contractor has access to the client’s systems and project team members.”
Mutuality of obligation is now a ‘grey area’
Mutuality of obligation (MOO) is very much a grey area which, according to Maley, about half of contractors taking the test pass on the first go.“In the early days of IR35, ‘MOO’ was an important indicator of employment status, but case law has changed that. The key IR35 defence is to have end dates to contracts, even if the expectation is that the contract will be renewed, and to minimise termination notice periods.”
Maley recommends that, if a notice period has to be included it should not exceed 30 days, and periods should mirror each other for each party. “If the contractor must give 30 day’s notice it is important that the same condition applies to the agency or client. Long notice periods strongly imply there is an obligation for the client to provide work for the contractor during the period, which in turn is a strong indicator of employment.”
Obtain a confirmation of arrangements signed by the client
A compliant contract is good, but the actual working practices of the contractor and their relationship with the client are also crucial. Maley urges all contractors to create a ‘confirmation of arrangements’ document and have it signed by the client.
“IR35 cases come unstuck when HMRC latches on to a client who may not realise that, through clever questioning and note taking, HMRC can get them to describe a relationship that may not be completely accurate,” he warns. “Having a confirmation of arrangements that details the nature of the working relationship forestalls any inquiry. Certainly, we’ve never lost an IR35 case where the client signed a confirmation of arrangements.”
ContractorCalculator’s free online IR35 Test can provide contractors with valuable insights into their IR35 status and suggests steps they might need to take to ensure their contracts remain outside IR35.