IR35 status determination: common pitfalls you're bound to come across
Depending on who you talk to, January has either been the slowest, most tedious month of the lot, or else it flies by with little regard for those of us who want to get ourselves organised at the start of a new year. For those preparing for IR35 reforms coming into effect in April, it's definitely the latter.
The general consensus is that IR35 is coming, so it's important that you, as a contractor, prepare as much as you can to is minimise any disputes about your IR35 status with your end client. Ultimately, they will be responsible for making this determination, but there are steps you can take to make sure you stay on the right side of the legislation.
We've put together this guide to the most common contract and working practice pitfalls to help you ensure you get the right status determination and don't run into any issues further down the line. Alternatively, click here to join our webinar on 20th Feb.
Review your contracts
Our first piece of advice is to get a professional and impartial working practices review that will be able to tell you your current determination and help if you do end up answering to HMRC. If your IR35 status is determined by your end client then it's worth considering a contract review too. If any changes to your contract or working practices are needed in order to sit outside IR35, then you should discuss these with your end client or your recruiter.
If you have, or are set to purchase, our Standard or Premium IR35 Protect Insurance then you will have access to either one or unlimited IR35 Status Reviews from IR35 Specialists Larsen Howie. As part of this you will get access to their SIFT tool, an accurate, industry-recognised alternative to the CEST.
But what are the pitfalls that you should you bear in mind when negotiating new contracts with clients and assessing your working practices in the future?
Are you B2B?
The contract should not suggest in any way that the client is hiring you personally. Your contract is a business-to-business arrangement in which the client is engaging your limited company to provide them with a particular service. This means that the contract should use your business's name rather than your name, and that you should be signing on behalf of your business, rather than for yourself.
Is your contract project-based or role-based?
Ideally, a contract should be hiring your business to work on a specific project, not for you to fill an ongoing role there. Contracts should discuss projects rather than job titles, and should avoid things like specific termination dates, which could lead to the suggestion that this is a fixed-term employment contract and place you inside IR35.
Are you paid an instalment or a salary?
This is another key point to keep in mind. If the contract is worded to look as if you are being paid a salary (a fixed, regular, guaranteed sum for the duration of the contract) then this looks more like an employer-employee relationship that could see you fall inside IR35.
For shorter, simpler contracts, ideally you should invoice for and be paid a pre-agreed amount upon completion of work. We understand that this isn't always possible though, as on longer, more complex projects you could be left out of pocked for months on end. In these cases, the contract should note your right to submit invoices to the client once specific project milestones are completed.
It should also make it clear that any mistakes are up to you to rectify at your own cost, which is where having appropriate contractor insurance is useful both as an IR35 indicator and as a practical financial protection for you and your business.
Are you or your client in control of your work?
Control is a really important component that is often looked at when IR35 cases go to tribunal. For you to be outside of IR35, your client should have minimal control over how you provide your services. If they do, then they could be seen as your employer and you could be determined as being inside IR35.
Generally speaking, as long as you are delivering project requirements and meeting deadlines, you should have the freedom to work without being managed in the same way an employee would be. For example, your contract shouldn't stipulate how you will complete your deliverables and when you should start and finish your working day.
That being said this can vary between industries, especially those with strict quality control procedures or specific site-opening times. It could be acceptable, for example, to expect you to be available during certain hours so you can deal with overseas clients. It essentially comes down to whether the level of control goes beyond what you would reasonably expect for that industry. Getting an impartial status review can help iron out these potential issues.
Are you allowed to send in a substitute?
Right to substitution is another key factor in determining IR35 status that should be included in your contract. It simply means that you are free to send an appropriate substitute to complete the work in your place if you are ill, on holiday, working on another project or for any other reason you see fit. To look at it in everyday terms, if you were to hire a gas fitter to fix your broken boiler, you wouldn't care if the gas fitter who turned up was the one have spoken to or another one, as long as they were qualified and able to get your central heating working again.
This is the same principle. It shouldn't matter who is carrying out the work, as long as the project is completed to the right standard. If you are outside of IR35 then there should be a clause in your contract stating that this is the case. Even if you don't have this clause it still comes down to whether you could theoretically send another, equally qualified, person to provide the services in your stead. If you can then you have the right to substitution.
Are you free from MOO?
No, we aren't making odd references to cattle. We're talking about Mutuality of Obligation (MOO), which is another element that could affect your status determination.
Is there an expectation that your client will provide you with consistent work? Do you feel as if you have to accept work from a particular regular client? If the answer is yes, that suggests that there is an ongoing obligation on each side to provide and produce work and that is MOO. Where this exists, it points to a relationship that is more employer-employee than business-to-business. To avoid this pitfall, your contract should be clear that there are no rolling tasks and that the contract ends when the project does. This doesn't mean that there can't be more contracts in the future, but there should be no expectation of them and any further work should involve a new contract and separate specification.
As we've already mentioned, ultimately, it's down to your end client to determine your IR35 status under the new legislation. But we firmly believe that if you as a contractor are well-versed as to what should and shouldn't be part of your contracts and working practices, you can work with them to make sure that you stay on the right side of IR35 and that everyone is happy.
Although some factors carry more weight than others if you were subject to an enquiry, it would take a holistic view of your contract and working practices. This is why it's good practice to get an accurate review of your IR35 status to get to grips with where you stand.
If you want further protections against the new IR35 legislation, take a look at our Legal and IR35 Protect Insurance packages or speak to our expert team on 01242 808740.