Read our 'Guide to IR35' and stay ahead of the game.
Don't be a victim...survive IR35!
Introduction
The purpose of Nasa's IR35 guide is to help you understand more
about IR35 and to find out how to avoid being caught
out by it. The guide includes information on where the
legislation came from and why along with assistance in
determining whether or not your contracts fall, as HMRC would say
'inside' or 'outside' of IR35 ('inside' would mean that you are
caught by the legislation and IR35 would apply, whereas 'outside'
would mean that the IR35 legislation doesn't apply to you and you
can continue working in the same way). It should be noted
however that this document should not be used as a tool that solely
determines your IR35 status and it is strongly recommended that you
seek a professional IR35 review of each of your contracts along
with your true working relationship with each client, to truly get
to the bottom of your IR35 status.
So, let's start with the basics. What is it,
where did it come from and why?!
IR35 is a piece of legislation that was introduced by HMRC back
in April 2000. The legislation is called the 'intermediaries
legislation' however it is now most commonly known as 'IR35'. IR35
is intended to stop the abuse of individuals who are treated the
same as an employee however they provide their services via their
own personal service company to try and disguise this fact.
Individuals do this as they wish to avoid PAYE - working via your
own personal service company enables you to save substantially in
tax and NIC.
If HMRC instigate an investigation and consider that the
contract is 'caught' by IR35, they will calculate a deemed payment,
treating all income received as salary and demanding all tax and
national insurance contributions on payments originally paid out as
dividends.
Unfortunately, there are many contractors who are in fact
genuinely self-employed and who have to struggle to prove it to
HMRC. This is why we cannot stress enough how important it is
for you to gain professional advice and assistance from the outset
so that you can build a solid, compliant base for your business and
retain this going forward. One major problem with IR35
however, is that the interpretation of it is reliant on case law
and as such, the determining factors surrounding IR35 tend to
change over time and certain issues become more prominent following
each significant case.
Let's get down to the nitty gritty…
When determining your status, HMRC will be investigating the
written contract that exists between you and your client (and the
contract that exists between your client and your agency if
applicable). They will also wish to investigate the actual
relationship between the parties, looking at your true working
practices to see how your work is provided on a daily basis.
HMRC have certain criteria they look at when carrying out an IR35
investigation. The three main criteria are; Personal
Service/Substitution, Mutuality of Obligation and Control.
There are other factors to take into account too but over time
these three have become the major hurdles to jump over. We
will list the other factors and talk about them in more detail
later on.
So, let's learn and understand more about each of the three main
criteria.
1. Personal Service/Substitution
If you are genuinely self-employed, you enter into a contract to
provide a service, not an individual. Therefore, the personal
service of a particular individual is not what the client should be
paying for. This is what HMRC are trying to get to the bottom
of. With this in mind, should you be unable to provide the
services for whatever reason, HMRC would argue that you should be
able to source an alternative worker, a 'substitute' to continue
providing the services on your behalf. You should of course retain
responsibility for any substitute worker and this includes paying
the substitute. Of course it's not that easy. And in
most circumstances, a substitute worker just isn't necessary.
This makes the personal service/substitution criteria a very tricky
one to defend. This is why it is imperative that a genuine
right of substitution exists within your written contract with the
client. In actual fact, if your contract doesn't contain such
a clause, it is likely to fail a review instantly. As a
guide, we have included a suitable 'compliant' substitution clause
below:
The Consultancy shall provide suitably qualified personnel
to carry out the services. In the event that the
Consultancy's initial personnel is unable to provide the services,
the Consultancy shall organise a substitute of equivalent skills
and expertise to complete the services. The Consultancy shall
remain at all times responsible for the services completed and will
bear the costs of any substitute worker.
It is important that a substitution clause is not too
restrictive i.e. making reference to the fact that the client will
ultimately decide on the suitably of the personnel, or having to
give notice to the client in order to use a substitute is not
acceptable as it inflicts too much control over the situation by
the client. You have to demonstrate that you are running a
genuine business and therefore you have a genuine right to provide
a substitute. The client should only be able to reject a
substitute on 'reasonable' grounds such as a lack of qualifications
or experience.
2. Mutuality of Obligation
This is probably the hardest test of all to overcome and it can
get a little confusing but in simple terms, when you are employed,
there is an obligation for your employer to continue providing you
with work and you are obliged to continue working for them.
There is no set completion date to your employment. However,
with self-employment, the situation is quite the opposite.
You are not obliged to continue providing services to the client
and they are not obliged to provide you with work. You
usually have a completion date to your contract at which point all
services will come to an end.
When work is carried out over a continuous period of time, HMRC
argue that employee status has been created by custom and
habit. This is why many contractors prefer short contracts
and to move on regularly.
It is extremely important for your written contract to contain a
completion date. This can be extended at a later stage if
necessary however without an indication of when the work will
cease, HMRC will take the view that it could be on-going and
therefore a mutuality of obligation could exist.
A useful clause to include in your written agreement with the
client is included below:
There is no obligation for the client to provide continual
work to the Consultancy and the Consultancy is not obliged to
accept further work if offered. Both parties agree and intend
for there to be no mutuality of obligation.
3. Control
Control is very important and is probably the easiest test to
prove. You need to be able to demonstrate that you have
control over how, when and where the services are provided.
The client should not be controlling or supervising your work on a
daily basis, telling you what hours you will work and where you
will be working from, as would be the case in an employment
role. Neither should the client be able to move you from job
to job as this would also demonstrate too much control over
you.
How you perform your services should be up to
you. Once the overall specification has been provided to you,
it should be up to you how you get the work done as long as it is
completed within the overall timescales agreed. You should
not be monitored or supervised. Regular updates are
acceptable to ensure that the project is going to be completed on
time but overall, how the work is completed should be down to
you. You are a professional business after all.
When you perform the services should also be at
your own control. You should not be expected to work a
standard 9 till 5 day as the client's employees may work. In
fact, it is probably better if you don't. As long as the work
is being done and deadlines are being met, there should be no
reason why the client should have any control over your working
hours.
(The recording of your time on timesheets is perfectly
acceptable and is industry standard and although HMRC may comment
on this form of time recording, it will bear no real importance in
an overall investigation. If you are able to do so, it is
worth recording your time on your own timesheet system rather than
using the clients.)
Where the services are performed - if you are
dealing with a client who has high security and confidentiality
systems in place, i.e. a bank, you may not have any choice but to
provide all of the services from the client's site. This
would be acceptable. However, wherever possible, you should
provide the services from your own location as this helps to
demonstrate that you have control over where the services are
provided. If there are no real reasons why you cannot work
from your own premises, but you choose to work at the client's site
each day, working standard office hours, HMRC could try and use
this against you as it would be a similar working pattern to that
of the client's permanent employees and it will not demonstrate
that you have any control over where you perform your services.
A suitable control clause for inclusion in your written contract
is included below:
The Consultancy has full control over how, when and where
the services are provided. The client shall not exercise any
control, supervision or direction over the Consultancy in the
provision of the services. The Consultancy shall have
autonomy over their working methods but will co-operate with any of
the client's reasonable requests. The services shall be
provided at such locations and during such hours as the Consultancy
deems appropriate for the satisfactory provision of the
services.
So, we have covered the three main tests HMRC use when
investigating a contractor under the IR35 rules, however there are
also other factors that are taken into account and are often used
to build a case. These factors should be taken as seriously as the
three tests commented on above.
Equipment
As a self-employed contractor, HRMC would expect you to provide
your own equipment. In some situations, this can prove
difficult and again, using a bank as an example, it is very common
for them not to allow contractors to use their own laptops for
security and confidentiality reasons and HMRC have difficulty
arguing with this (although they will of course try). Despite
this, you should still have adequate equipment to carry out your
services as it should not be expected that every client you work
for will have the same issues and restrictions. Also, you
would need to use your own computer to do all of your business
administration and support relating to your client and the work you
are doing for them, you should also have your own business mobile,
reference manuals, stationary etc… In situations where you
have to use the client's equipment, you should ideally make a
payment to the client for the hire of the equipment, even if it is
just a nominal amount. Training is also important as if
training is required, this should be paid for by you as it is a
benefit to your business.
With regards to your written agreement, if your client provides
all of the equipment and pays for any training necessary, and this
is confirmed on paper, the agreement is likely to fail a
professional review.
Financial Risk
HMRC will always look at the financial risk being taken by a
contractor when determining their IR35 status. If you are
genuinely self-employed, working via your own limited company, you
should most certainly be taking an element of financial risk.
For example, you are responsible for your business, you provide all
of your own equipment, you hire your own individuals to assist you
etc. HMRC are looking for all of these things to help prove
that you are genuinely self-employed and that you therefore take a
genuine financial risk. Where there is no risk being taken,
it is hard to see how anyone can be truly self-employed.
Basis of Payment
Although the basis of payment isn't detrimental to your IR35
status, as many cases have succeeded where hourly and daily rates
have been applicable, the basis of payment can be useful in IR35
investigation cases. Often, some Inspectors believe that
hourly, daily and monthly rates of pay are associated with
employment and that a self-employed individual should invoice and
receive payment on completion of the services provided.
However, there are, and have been for a long time, many knowledge
based professionals who are paid by the hour or day and so this
argument doesn't really stand up. To strengthen your position
however, it is certainly worth providing an overall estimate of the
project and services to be provided and invoice at identifiable
stages wherever possible. It is also important to bear the
cost of your own expenses and overheads. These should be
considered in your quote for the services or when the rate is
agreed at inception.
Exclusive Service
As a self-employed contractor, you should not be bound to any
one client. Your contract should ideally contain a
non-exclusivity clause specifically stating that the agreement is
not exclusive and that you are able to provide your services to
others during the course of the agreement. This is very
important and if your contract implied that you were not able to
provide your services to others, it would be considered a failing
factor.
Part and Parcel
This is another important factor to take into account as HMRC
will look to see whether or not you have become part and parcel of
the clients business. This may include things like business
cards which imply that you are employed by the client, receiving
the same benefits as the clients employees (for example a
subsidised staff canteen), being included on staff social events,
having a staff parking space, a staff entry badge etc… It may
seem like small unimportant things, but they can actually harm your
self-employed status. If you are asked to provide client
business cards, they should clearly state that you are a
self-employed contractor, as should the entrance badge. You
should not have a dedicated parking space, be able to use a
subsidised canteen or have free use of the staff gym. You
have to completely separate yourself from the client's
employees. If you receive the same staff benefits, over time
you will start to integrate yourself into the clients business and
become part and parcel of the client's organisation.
Business-like Trading
Being able to demonstrate that you are in business on your own
account is useful. It is good to be able to show off your
business-like assets such as your VAT registration (if applicable),
business insurances i.e. EL/PL and PI, health and safety
requirements, licenses, advertising etc. Anything that helps
to show that you are a genuine business can be shown to HMRC in the
event of an IR35 investigation.
Working Practices
Throughout this guide, we have mentioned both the written
contract and your actual working arrangements/working practices as
each entity bears an important weight in its own right when it
comes to IR35. HMRC do state however that although the
written contract is taken into account, it is the true working
relationship that is important and therefore, we strongly advise
that once you are confident that your working practices are
compliant, ask your client to sign a 'Statement of Working
Practices' document confirming and agreeing to how you provide your
services on a daily basis and your working relationship with
them. This document can then be used in an investigation and
has proved in the past, to be an extremely powerful document to
have. Simply asking your client to confirm how you work can
save a substantial amount of time in an investigation.
(If you would like a template copy of the 'Statement of Working
Practices' document, please give us a call and we'll email a copy
to you.)
Summary
To summarise, if you're going to survive IR35, you need to have
a compliant contract that contains all of the key IR35 assessment
criteria and you need to ensure that your contract and working
practices reflect one another. If you would like to have a
professional review of your contract and working practices, please
do not hesitate to contact us on 0117 904 7755 or at info@nasaconsulting.com
and one of our friendly experts will be happy to assist.