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The best way to ensure your contracts (and assignments) are outside of IR35 is to ensure they accurately reflect the working practices you follow with your clients. HMRC will ‘look beyond’ your actual contract and examine the working practices you follow on each assignment if they decide to query your IR35 status.
(Note: Due to the COVID-19 outbreak, the government has delayed the scheduled changes to the rules surrounding IR35 in the private sector. These will now be introduced on 6th April 2021, a year later than planned.)
Long-term contractors and freelancers who work through a limited company will need to ensure their contracts accurately reflect the working practices followed in their assignments. Contracts will need to be checked for each assignment on renewal and must provide clear evidence to support your status as a self-employed professional.
HMRC investigations are not confined to the detail contained in an individual contract. HMRC will ‘look beyond’ the contract to examine the working practices you follow with your clients. If HMRC decides the relationship is of an employment nature, they will seek to recover all income tax and National Insurance Contributions due over the period of the assignment involved.
Determining whether IR35 applies to your assignment is a complex matter. There are three key principles that will determine your IR35 status:
These three principles remain the same regardless of whether you work in the private or public sector. You’ll need to demonstrate that they don’t apply to your contract and working practices to avoid being affected by IR35. If your contract with an end client is a contract for services, rather than a contract of service, it’ll usually fall outside the scope of IR35. For example, if you can send another person (‘substitute’) to perform the services agreed in your contract, there’s no obligation of personal service and IR35 shouldn’t apply.
Let’s look at these three key principles in more detail.
Supervision, Direction and Control are tests of ‘employment’ that could put an assignment inside IR35.
‘Supervision’ means the extent to which your client oversees your work and how you perform it to a standard they have specified.
‘Direction’ means your client directing how you complete your assignment, by providing instructions, guidance and advice as to how the work is to be done. Someone providing direction will often coordinate how the work is done as it progresses.
‘Control’ is where you have someone dictating the work you do and how you go about it. This also includes the power to move you from task to task as priorities change.
These clauses should never appear in a contract – to be truly self-employed contractors and freelancers should have control over when and how they work, not the client. Having a project basis to the work performed is an important indicator of IR35 status.
As a contractor, it’s likely that you’ll work to a comprehensive job specification. This specification would outline:
A contract may go further, though, and say that you must submit to management guidance, appraisal or monitoring. If you find yourself in this position, HMRC will probably conclude you are under the control of your client – this will make you, in their eyes, an employee and not a contractor. For more information on the Supervision, Direction or Control (SDC) test and how to use it to identify your IR35 status, you can read our SDC article.
Another test of ‘employment’ is whether your business can provide a substitute to do the work. You should be able to send a substitute to complete the work on your behalf or reassign the work. The right to send a substitute, however, must be absolute, and not so restricted that you basically have to perform the work yourself. If you genuinely can provide a ‘substitute’ and on occasion actually do, then the contract is likely to be outside the scope of IR35.
If the client is only interested in your own suitability and skills and no substitute can be offered or accepted, then any substitution clause will likely fail under HMRC scrutiny. If you have to personally provide the services agreed with your client, this is usually an indicator that you’re an employee and aren’t self-employed.
To qualify as a contractor, there must not be a ‘mutuality of obligation’. There are two obligations to consider:
Put simply, a contractor must work from project-to-project, with no obligation to carry on working for the client after the work is complete. A contractor also has the right to terminate a contract part-way through. An employee, on the other hand, can only work for one company and has an obligation to carry on working when their tasks are complete.
You should also check whether the contract allows you to take on projects from other clients simultaneously, or whether the client can veto other assignments.
If the contract specifies exclusivity, and states that you must work a certain number of hours per week at a certain rate on an ongoing basis and requires you to take whatever work the client throws at you, then this would suggest the contract should be inside IR35.
An IR35-proof contract must state the client has no obligation to offer you more work and you have no obligation to take it (this is what is meant by Mutuality of Obligation). Provisions to extend the contract should be avoided.
Along with the three key areas highlighted above, you need to be aware of the following:
Other things you should take into account are being able to demonstrate that you are “in business on your own account” – you may not have stock, premises, or staff but you will probably have an office (even at home), a website, be VAT registered, have business stationery, advertising, invoices, insurance and have other clients and an accountant.
You should always seek specialist advice on your IR35 status, just to be safe. The good news is that Crunch can provide this service for our clients, so get in touch and let us know if you need any help.
Our “What is IR35?” hub is the place to head for all things IR35 – we have an independent IR35 Calculator tool to help you see if you’re at risk from IR35, a jargon-free IR35 business guide as well as articles explaining everything you need to know about IR35. For Crunch clients, we also have an IR35 service for those looking for our expert guidance.
Another excellent resource for IR35 guidance ins the Gov.uk website – in particular the Employment status guidance for employed or self-employed
Please note that the advice given on this website and by our Advisors is guidance only and cannot be taken as an authoritative or current interpretation of the law. It can also not be seen as specific advice for individual cases. Please also note that there are differences in legislation in Northern Ireland.