Determining your IR35 status

Determining your IR35 status and what to do if you fall inside IR35

It’s certainly advisable to take a proactive approach to IR35 to properly determine where your status lies, and to ultimately ensure that you are paying the correct amount of tax.

Whilst most limited company contractors are aware that they are responsible for determining their IR35 status (unless operating in the public sector), we are often asked what you should then do with the result, and what it means in practice.

One of the first steps in an IR35 enquiry is for HMRC to request copies of the contracts which fall in the year(s) of enquiry. It makes sense therefore to have your contracts reviewed as one of the first steps in determining your tax status.

Have your contracts reviewed

Having your contracts reviewed by an IR35 expert will provide you with the evidence needed to present to HMRC in an enquiry that the written terms positively address the key tests used to determine IR35 status as laid out in case law. Often contractors are issued standardised contracts from recruitment agencies and therefore may not be a true representation of the engagement, whether positively or negatively.

The person reviewing your contract should be able to point out any areas of concern and suggest alternative wording, as well as suggesting additional clauses to add to the contract, but the terms of your contract should always reflect reality.

Check your working practices reflect the terms of the contract

Whilst having the contractual terms reviewed is a positive step, it is essential to combine this with a review of your actual working practices in order to identify your true IR35 status, and if needed, demonstrate that the contractual terms accurately reflect how the services are to be carried out.

Potentially, your contract could positively address every key employment status test (effectively making you appear as outside of IR35) however if this doesn’t reflect the actual reality of your working arrangements, the contract would have very little bearing in an IR35 enquiry. Although HMRC usually begin by requesting copies of the contracts, they will then seek to get to the bottom of the actual working practices which often involves contact with the end client(s).

The view of the end client is important

To establish whether a contractor is a disguised employee, having first reviewed the contractual terms, HMRC will usually contact the end client(s) directly. Contact may be made by phone, letter, or a face-to-face meeting which is often HMRC’s preference. HMRC’s questioning to the end client will address all of the key employment status tests, the most important ones being;

• Right of Substitution/Personal Service
• Control
• Mutuality of Obligation

It is also important therefore to establish how the end client views your employment status.

What to do if you fall ‘Outside IR35’

By having your contract and working practices reviewed, and speaking to your end client, you have operated due diligence in determining where your status lies.

If you have determined that your status falls outside of IR35, in the event of a challenge by HMRC, you can demonstrate to them that you have properly checked your status, and more importantly that there are sufficient grounds upon which to defend your status. HMRC will look to impose penalties (which could be up to 100% of the tax due) where a contractor has not undertaken reasonable care to determine their tax status.

What to do if you fall ‘Inside IR35’

If, having reviewed your contract(s) and working arrangements, it has been determined that you fall inside of IR35, you should not panic. It is much better to have come to this conclusion before HMRC undertake an enquiry.

Operating inside IR35 simply means paying the relevant taxes due (which will be higher than when operating outside IR35). This would involve making a ‘deemed payment’ of income tax at the end of the tax year. You will also not be able to claim travel and subsistence expenses in relation to such a contract.

It is still possible to continue to operate outside of IR35 on other contracts through your limited company where the terms and working arrangements reflect genuine self-employment.

For those likely to be operating in mostly inside contracts, many choose to use an umbrella company. There are a number of reputable providers, however caution is advised with umbrella companies who might be offering contrived payment schemes, resulting in paying little tax and which might seem too good to be true. HMRC are actively enquiring into anyone having used such schemes which they refer to as ‘tax avoidance.’

Continuing due diligence

Make sure that you check your status for each and every contract in addition to having your working practices reviewed, which could potentially change with each client you work for, and pay the relevant taxes for your circumstances.

IR35 has always been a complex piece of tax legislation but checking your tax status for each piece of work you undertake will provide a peace of mind, and if the dreaded brown envelope does land on your doorstep, you will be much better equipped to deal with it and successfully defend your status.

Considering putting Tax Enquiry Insurance in place to deal with a potential enquiry can also provide more peace of mind with experts on hand to deal with an IR35 enquiry on your behalf, and the professional fees incurred covered by the policy.

HMRC are considering introducing IR35 reform into the private sector; a Consultation Document on reform was published on 18th May of this year and closed on 10th August. A discussion document which will detail responses to the consultation, will be published in due course. In the event that reform is introduced into the private sector, undertaking due diligence and speaking to your end client could quite literally pay dividends.