Determining your IR35 status is paramount to enjoying maximum tax benefits of running your own company along with peace of mind that there will be no surprises around the corner from HMRC.

In or Out of IR35

IR35 status is determined on a contract by contract basis. Because IR35 is anti-avoidance legislation to catch disguised employment, any non-I35 contract would need to be clear and specific about arrangements such as lack of direct client control, use of own equipment, right of substitution, lack of mutuality of obligation, as well as others.

When carrying out a contract review we are looking to establish whether any of the three pre-requisites to employment are missing and that the status of the relationship between the parties is therefore one of self-employment. The 3 pre-requisites are:

  • An obligation for the worker to provide personal service
  • Mutuality of obligations between the parties
  • Sufficient control to create a master/servant relationship
If any one of the 3 pre-requisites to employment is missing then there is no contract of employment and IR35 is therefore defeated.

Personal service

The contract should be between the client and you’re Company rather than you personally which is an essential first stage in establishing that there is no requirement for personal service. In addition we have to ensure that there is no requirement for a particular individual to carry out the work.

Although you may be named in the schedule as the Individual who will provide the services the contract should allow a Substitute to be appointed to perform the services. Personal service is not therefore required.

The right to select the substitute and the responsibilities with regard to paying and ensuring that the substitute is suitably skilled is therefore that of the Consultant.

Mutuality of obligations

In order to establish whether there is mutuality of obligations between the parties to the contract we are looking for clauses that indicate whether the client is under any obligation to provide work to the Consultant and whether the Consultant is obliged to accept any work that is offered either during the course of the contract or at the end of the contract period.

If there is no obligation for further work to be offered or accepted and then there is no mutuality of obligations beyond the assignment.

In addition we have to look at the obligations of the parties during the period of the assignment and the conditions under which it can be terminated.

A good defence against IR35 is that there should be no obligation for the client to provide work to the Consultant for the period of the assignment.

Control

Where an employee/employer relationship exists the employer has the right to control how the work is performed by the employee. We therefore look for clauses in the contract that indicate that the Consultant is not controlled by client.

Clauses such as “the Consultant the Individual(s) and any Substitute are entitled to exercise reasonable discretion in the manner of the performance and in the organisation of the Services.”
are useful for IR35 purposes as they indicate that there is no control over the Consultant or its workers.

Other useful clauses in the contract may refer to the Consultant’s expertise and specialist services which tend to suggest that the client will rely on the Consultant’s ability to carry out the work rather than controlling how it will be carried out.

Financial Risk

The financial risk of the Consultant is also an important factor in establishing self employment although not considered to be one of the 3 main pre-requisites. When an employer/employee relationship exists there is generally no degree of financial risk to the employee. A contract for services which defines the risks and responsibilities of the Consultant differentiates itself therefore from a contract of employment.

A clause should detail the financial risk and include a requirement on the Consultant to have insurance in place to cover its liabilities.

Other factors

There are also a number of other factors that could be taken into account to defend an IR35 challenge:
  • There should be evidence of a business to business relationship in that a
    VAT invoice will be issued for payment of services rendered and payment
    will be made on a payment policy of 30 days net monthly (for example)
  • The Consultant and the individuals performing the services can carry out
    other work during the period of the contract provided there is no
    conflict of interest.
  • The Consultant should provide such tools and equipment as necessary for the performance of the Services.
  • The intention of the parties is that there is no contract of employment
    Although the intention of the parties is insufficient on its own to
    defeat an IR35 challenge it is nevertheless useful to have in a
    contract.
A properly structured contract, with reference to the above points, provides a good defence against IR35 and addresses the main areas required to establish that a contract of employment does not exist and that the relationship between the parties is one of self-employment.

The Importance of Regular Training

Because the original IR35 legislation was so vague, case law has been evolving with each HMRC investigation, and so too has the defences.

AccountsNet are a PCG Accredited Accountant, and our staff undergo regular on-site training at their headquarters. This ensures that we keep pace with HMRC regulation and the special commissioners judgements handed down from recent IR35 cases.

We will provide a full and complete written report on their findings, along with suggested mechanisms, if required, to bolster IR35 defence. These can then be incorporated by the agency into the contract.

Our fee for a comprehensive IR35 Contract Review is £100 plus VAT, and gives peace of mind that your contract has been carefully checked by a qualified expert.

 

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