The Professional Contractors Group (PCG) has released an updated version of its Guide to IR35 for freelance consultants and contractors. The guide has been updated to include references to recent cases such as the Dragonfly Consulting judgement.
Its release coincides with and complements the publication of the Contractors’ Handbook: the expert guide for UK contractors and freelancers, written by ContractorCalculator CEO Dave Chaplin. In addition to the latest, accessible IR35 guidance based on interviews with leading industry experts, the book’s 500 pages contain essential guidance on all aspects of contracting.
The updated PCG guide, which has been revised by Abbey Tax Protection (formerly Accountax), draws a line in the sand by emphasising that the ‘big three’ status indicators are substitution (or personal service), direction and control, and mutuality of obligation are the key factors.
According to John Brazier, managing director of PCG, who also provides the foreword to the Contractors’ Handbook: “It’s still entirely possible to work outside IR35, despite the shock of the Dragonfly case earlier this year. What that case showed is that the traditional advice remains sound, but must be followed thoroughly and carefully.”
Key tests of IR35
Contractors are again reminded that there are three key tests that will determine the IR35 status of their contract:
It's still entirely possible to work outside IR35, despite the shock of the Dragonfly case earlier this year. What that case showed is that the traditional advice remains sound, but must be followed thoroughly and carefully
John Brazier, PCG
- Substitution, or ‘personal service’
- Direction and control by the end-user client
- Mutuality of obligation between the end-user client and the contractor.
According to the guide, if all three of these tests place a contractor’s contract within IR35, then the secondary issues will have no bearing on the contract status.
However, if the outcomes of the tests are inconclusive, then a range of secondary factors come into play, such as financial risk and being in business on your own account.
Creating an IR35 compliance file for each contract is a vital step in proving, in the event of an investigation, that the ‘big three’ plus the secondary factors support the contract’s status.
The paper trail a contractor maintains could mean the difference between the contract being proven as inside or outside IR35. Therefore, it is potentially the difference between the contractor winning their case or having to pay huge sums in back taxes, interest and penalties.
Upper and lower contracts
Contractors are urged to insist that, if they are working for their end-user client via an agency, the agency-client contract matches the contractor-agency contract.
If the agent is unwilling to confirm this before contract starts, then contractor may wish to consider whether or not they should proceed with taking on the contract and working without knowing whether the agency-end user client contract will affect their contract’s IR35 status.
As both the Contractors’ Handbook and the updated PCG guide highlight, if HMRC spots inconsistencies between upper and lower level contracts, the contractor could be ‘caught’ without even knowing the details of the upper level contract.
Know when to ask for expert help
The circumstances of every contract that a contractor is considering will be different, and this is acknowledged by the Contractors’ Handbook and the PCG guide, both of which agree there are occasions when expert professional assistance is required.
However, contractors will benefit from understanding the in-depth advice in the PCG guide and the accessible, all encompassing information on IR35 in the Contractors’ Handbook, which also covers every other aspect of the contracting lifestyle and life cycle.