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How to prove IR35 does not apply to you

Contractors should arrange to obtain and to keep certain documents to prove, as best as one can, that they are outside IR35.

Should HMRC conduct a tax inspection and dispute your status, you will be faced with a tax inspector who will look at your evidence. They will need convincing with as much proof as possible of what actually took place between you and the agency, and between you and the client.

Employees versus contractors

How do you prove that you're a contractor, not an employee? In some ways, one is very like the other. But the law stipulates ways in which they are different. To understand how to prove status, one needs to understand the legal concepts involved.

An employee is someone who goes to work at the same offices of the same firm every business day, and who performs a whole range of tasks covered by the job description at the employer's discretion.

A contractor is someone who provides a specific service--the more specific the better--for a given fee. The employer does what the boss says. Contractors make their own decisions, run their own companies, work wherever is necessary--but not necessarily at the offices of the company--on their own time, at their own expense, and may send someone else to do the work at their own expense.

On this basis, proof of being a contractor naturally resides in showing that you acted during the contract period in certain ways.

Since the Autoclenz judgement the contract paperwork cannot be relied upon as bullet proof evidence and a defence against any challenge by HMRC. Why? Because judges can now simply put contracts aside if they consider them a sham and make a decision based entirely on the reality on the ground - which we call the working practices.

This is why any evaluation for your IR35 status must examine the working practices first, and then, assuming you are not caught by IR35, as secondary check you can make sure the contract aligns with those working practices. Of course, if your contract does not reflect the working practices then you can also use Autoclenz to argue your case by putting the contract aside - the only problem being that this is likely to prolong any investigation - which means considerably more cost.

So, the best proof of all, is to have both your working practices correct and your contract aligned to them. So if you arrangement is one where you have the right to perform the work at any location you choose, at the hours you choose, and to have someone else do it at your own expense, and that you are responsible for your own expenses, then you might not need much more.

Unfortunately, and despite IR35 being introduced in 2000, still there are many contractor contracts that do not read like this. Often you are asked to work at the offices of the client, and the other terms about substitution, expenses, etc. are often left out.

Bring your own equipment

You may have some proof in your letter of engagement. Again this may not be specific enough, but it may help.

If you can't get these terms into the contract--and many agents are ignorant of them and afraid to put them in--you have to find other means of proof. One of the most powerful of these is a confirmation of arrangements letter--a list of these terms that you obtain from the client. If you use our IR35 Testing tool then the report is produces can be used as the confirmation of arrangements and signed by the client.

But apart from that, bring some of your own equipment and get some proof that it is used in the project. Send emails showing that you are using it.

Work at home

Get your project manager to let you do some of the work at home, and see that the email record shows this is taking place. Or simply get a note saying you can work at home.

The right of substitution is a very important proof of being outside IR35. Send the client or the agent emails about this. If you get a reply, that may prove extremely useful. Any other proof of that kind, like letters or notes from agent or client would help too.

Just remember that if you do substitute some of the work, or outsource it, then you must choose and pay the substitute, and the client must be aware this is happening - otherwise it doesn't count and may not give you the protection you are seeking.

Keep all the proof

Obviously keep any proof you can get that you've paid your own expenses. Not just receipts, but also any requests for materials needed from the client, any email asking you to pay expenses, etc.

So do make an effort to get as much proof as you can. Remember HMRC will go back six years if it decides to review your status, so you will need to save everything relevant for that time. Make sure that you get proof while the project is taking place, so you won't have to struggle to obtain it six years later.

Updated: Saturday, 30 September 2017

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