Suppose HMRC asks you to prove that you are outside IR35?
HMRC will potentially want to investigate all the way back six years, and ask you to prove that you had all the necessary arrangements in place to substantiate your decision to operate outside of IR35 on all your contracts. And it will definitely want to see the contracts that you had with your clients and/or agency.
Keep good records to stay outside IR35
Most of us know that keeping good records is important, but you might not suppose that that extends to proving you are outside IR35. In fact, should your status be questioned, HMRC will insist on seeing all the contracts and documents relevant to your working situation.
So, for the past 6 years, you will have to show every contract with your agent or agents, and proof of what the arrangement was between the agent and the client. For historic contracts it might be that those you worked with are no longer there, so gathering evidence many years down the line will simply not be possible.
Even if you could get someone at the client to state what terms you've worked on, will you be able to do that 6 years after the contract was completed? Probably not, which is why you must gather the evidence whilst you are working on the contract.
How to get client confirmation of your arrangements
It occasionally happens, but it is unlikely that you will be permitted to have access to agent-client contracts. Most agencies will refuse a request from you not least because you would then be able to see the rates they are charging for your services!
The danger here though is that any agency-client contract won't mirror the contract you have with the agency, and therefore HMRC will cherry pick the bad parts of the agency-client contract and try and use that against you. Even though you were not party to the contract, it is considered material evidence in an IR35 inquiry.
If you need a hearing about your status, the courts have made it clear that they require evidence from the client in all IR35 cases.
So it is far better for you to obtain some kind of confirmation of the arrangements whilst the contract is running and while there is an appropriate person who can comment on behalf of the client.
The confirmation letter will help combat any IR35 investigation
An excellent strategy is to use a client confirmation letter. this is where you make it very easy for your client representative to confirm your arrangements, and clarify the most important points about your contract and working arrangements.
You can make use of the following questions, but the list is by no means exhaustive, and it is recommended you take advice when approaching the client to agree to a letter, particularly because there may be aspects in the contract that need to be clarified further.
Key points in the IR35 letter
The respondent should reply 'yes' or 'no,' where appropriate, and the letter should clearly indicate the name of the client company and the date.
- What is the precise nature of the services provided
- What are the dates for the beginning and end of the engagement?
- If there is a requirement for the work to be done by a specific individual, the name of that person?
- Should the person named at (3) above be unavailable, does the service provider have an obligation to provide a replacement worker at the service provider’s own expense?
- Does the service provider have the right to undertake work using any workers of the service provider’s own choice, and at the service provider’s own expense, provided the workers concerned have the requisite skills?
- Does the service provider have the right to subcontract the services to another person, firm or company, provided the subcontractor has the requisite skills?
- What is the basis of payment? Wage or salary / commission / fixed price / hourly rate / daily rate / if other please specify?
- At what location(s) are the services provided?
- Does the service provider have the right to provide the services at or from a place of the service provider’s own choice?
- If the services have to be provided at a place decided by the customer or client, what is the reason(s) for this condition?
- Does the customer or client have the right to instruct the service provider to do other work not included in the services described at (1) above?
- How are the working hours decided? By the service provider / by the customer or client / by mutual agreement?
- Does the customer or client have the right to instruct the service provider about working methods?
- What is the nature of any rules or procedures governing the customer or clients own workforce that also apply to the service provider?
- What is the nature of the equipment that has to be supplied by the service provider?
- What is the nature of equipment that has to be supplied by the customer or client?
- Does the service provider have an obligation to compensate the customer or client for any damage or loss caused by the service provider’s negligence?
- Does the customer or client expect the service provider to rectify any defective work at the service providers own expense?
- Does the customer or client prevent the service provider from doing work for other customers or clients during the course of the engagement?
- What is the nature of any benefits provided to the customer or clients own employees that are made available to the service provider?
- If there is no work available is the customer or client obliged to find work for the service provider to carry out?
- If there is no work available would there be an obligation to pay the service provider?
How the letter can be used
You should decide who is the best person to sign the letter. Ideally it will be someone directly involved with the project you are working on, and not the company's legal department or someone from HR. That will help demonstrate that it is a real representation of what took place.
The usefulness of the confirmation of arrangements letter in IR35 cases is very much proven. They can be a very valuable piece of evidence and if correctly structured can be used to very quickly close down an IR35 inquiry by HMRC.
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