The UK's leading contractor site. 200,000 monthly unique visitors.

Relevant life insurance for contractors

Contractors must not be 'part and parcel' of clients to avoid IR35

Want to use the company canteen when you're working on assignment? Want to share car rides with other employees when you go home? Want to get a security pass to avoid the bother of signing in each time you have to get in to the office you're working at?

Well, don't! Even these small things can help to put you inside IR35.

IR35 case law is complicated

Determining whether a contractor is inside IR35 or not is a matter of very complex judgement on the part of the courts. There are many factors, and nearly all of them are abstract. All of the issues involved are the product of case law, and there is a lot of contradictory case law involved.

Tax inspectors aren't experts in IR35

The problem is that you won't be dealing with erudite and learned judges at first. The first step in assessing you will be taken by a local tax inspector, and they will simply apply the list of criteria that they've been told are relevant.

One of the 'tests' they will use is: are you 'part and parcel' of the client's organisation or not?

What does 'Part and Parcel' mean?

There are no clear criteria about what being 'part and parcel' means. The expression dates back to a 1952 case which first suggested that, when you get really involved with an organisation, for example, if you start managing clients, you must be 'part and parcel' of it, and so, an employee.

But, later case law just goes all over the place in defining 'part and parcel.' There are no clear determinations of what 'part and parcel' means. Many judges don't even consider this test a very useful one in determining employment status. In IR35 cases it is considered a secondary factor.

For example, in a judgement rendered in April 2006 by the Magistrates Court, the judges felt that a contractor who was clearly part of a corporate team was still an independent contractor.

HMRC made the 'part and parcel' argument, but the judges said, okay, he works on the team, but he's still just doing a project on an independent basis. He doesn't have to work by himself to be a contractor.

This should give you an idea of just how complex these legal decisions are.

To avoid IR35, avoid going to court in the first place

The best course is to avoid ever having to go to court at all. Bear in mind that HMRC can seek you out six years after the contract is over and accuse you of owing back taxes and interest on it. And the tax inspectors making this judgement aren't going to examine all the case law: they will just follow their instructions and if they decide you are within IR35, you'll have to fight them.

How to stay IR35 safe

To make certain that you don't get the tax inspectors thinking you might be 'part and parcel,' avoid looking like an employee. That seems ridiculous, but it's one of the things they consider.

Bear in mind that in modern times, particularly around the implementation of the IR35 public sector reforms, HMRC are often quoted stating that they consider two people doing the same kind of work as being the the same and therefore should pay the same levels of tax. That's not what the law says at all, but it's what HMRC thinks, and therefore the basis on which they may try to catch you as inside IR35.

So don't accept any of the little perquisites that employees take for granted. Don't accept a pass that lets you into the building through the employee gate; sign in every day.

Don't let them list you in the company telephone directory, and don't get your business cards from the company. Accept no sick pay or holiday pay from the client.

Don't eat at the company canteen. In so far as possible, see that you're not listed on company materials as part of the organisation.

If you have a management role, make it clear in written form that this is strictly related to the project you have contracted for. In general, it is best to avoid written materials that put you in the light of being an employee in any way; this is just the sort of thing HMRC will find six years later.

Pre-empting and keeping a compliance file is vital

If you think it's not worth the trouble, think again. Imagine when you get a tax audit six years later and you have to spend hours of time and lots of money fighting a review from the local tax inspector.

Sure, your chances in court are very good, as HMRC often lose. But the time and anxiety you will waste over it are far greater than what you will endure by avoiding the company canteen.

One of the first steps you should do is evalute your IR35 status. You can get a free IR35 review using IR35Testing.co.uk. If you pass, then you can download a detailed report for your client to sign. This will provide excellent evidence that you are not caught by IR35, and help your defence in any investigation.

Updated: 24 April 2017

If you need an accountant or are thinking of switching accountant please complete the enquiry form below:

Intouch accounting are our chosen partner for providing specialist accounting advice to contractors.

  • We only send your data to our chosen partner. More on how we use your data.

© 2018 All rights reserved. Reproduction in whole or in part without permission is prohibited. Please see our copyright notice.

Contractors handbook