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IR35 Advice Centre

 

IR35 Compliance Guide

IR35 Compliance Guide
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IR35 Guidance

 

IR35 Compliance for Contractors

Despite changes to the administration of IR35 from April 2021, the way in which it is determined remains the same.

Below we explain the main status tests that need to be considered to assess IR35, how to comply with the legislation and why. (Please note that this is only a brief guide; it is not intended to be a comprehensive analysis of employment status).

If you have any queries regarding IR35 or the below IR35 compliance guide, please do not hesitate to contact our consultancy department on 0116 2690 992 or [email protected]

 

Who is responsible for IR35 compliance?

 

The party responsible for IR35 compliance depends on when and with who you are contracting. Since 2000 when the legislation was introduced, it was the sole responsibility of the contractor, however, due to IR35 reform in both 2017 and 2021, this is not always the case.

The responsibility for IR35 lies with the contractor if:

  • you are providing services to a client in the private sector which is classed as a small company under the Companies Act 2006

The responsibility for IR35 lies with the end client/fee-payer if:

  • you are providing services to a client in the public sector
  • you are providing services to a client in the private sector which is classed as a medium or large company under the Companies Act 2006 from 6th April 2021

The off-payroll working rules, introduced in the public sector in 2017 and to the private sector in 2021, mean that it is the end client’s responsibility to determine IR35 status. It will also be the fee-payer's responsibility to deduct the relevant tax and National Insurance from source where you are determined as 'inside IR35'. For the private sector, this applies only to medium-large clients.

Every member of the contractual chain inbetween is responsible for ensuring they contribute to the compliance of an engagement by passing the status determination statement along the chain.

Read more about IR35 changes in the private sector.

IR35 Status

 

The key factors which determine your IR35 status

 

It is important to note that each working arrangement is reviewed on its own merits and all of the positive and negative elements of both the written contract and working practices will be weighed up in line with case law in order to provide a balanced opinion.​

When considering overall IR35 compliance for the entire engagement, it truly is a mixture of different factors, not simply the written terms. You should ensure that any contract proven to be outside of IR35 also matches the working practices of that engagement. So, if the contract says you are expected to provide your own equipment for the services, you should make sure that you are not using any client equipment during the provision of the services. This is because when determining IR35 status, the working practices are seen to hold more weight or are also referred to as the reality of the engagement.

What are the IR35 tests?

 
  • Office Holders

  • Right of Substitution/Personal Service

  • Control

  • Mutuality of Obligation (MOO)

  • Financial Risk

  • Right of Dismissal

  • Part and Parcel of the Organisation

  • Exclusive Services

  • Intention of the Two Parties

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meeting room with wooden chairs

HMRC’s return to PAYE compliance checks a possible route into IR35 enquiry

Ongoing PAYE compliance checks must be handled with care, given HMRC’s track record

After two contractors supported by Qdos were recently contacted by HMRC, which requested information relating to a PAYE compliance check, independent workers are advised to handle such enquiries with care. This is because in the past these seemingly innocent checks have resulted in IR35 investigations. 

Following the introduction of IR35 reform in the private sector earlier this year, much was made about whether HMRC would continue to investigate the IR35 compliance of contractors, dating back to a time when they carried the liability. 

Here at Qdos, our IR35 experts were often asked if, following the liability transfer that occurred as part of IR35 reform on 6th April HMRC would only focus on compliance among businesses.  

In other words, now that businesses impacted by off-payroll changes shoulder the risk, does the threat of an IR35 enquiry and possible investigation no longer hang over contractors? 

We have outlined in an article here that this is not the case and HMRC retains the right to launch an IR35 investigation into completed contracts held before the roll out of IR35 changes - both in the public and private sectors. 

And now, after two contractors came to Qdos having received letters from the tax authority as part of a PAYE compliance check in July, based on HMRC’s past behaviour, independent workers have every reason to remain cautious. 

We’ll explain why HMRC’s recent tax compliance activity is something that contractors need to be aware of, particularly when focusing on IR35. 


PAYE compliance checks can lead to IR35 investigations 

Going back as far as ten years, HMRC once regularly used a PAYE compliance check as a route into launching an IR35 investigation. 

The taxman would carry out these checks to make sure contractors were meeting their legal obligations as an employer - despite the contractor usually being the sole employee of their limited company. This would then give them the opportunity to scrutinise IR35 status. 

On the face of it, these letters sent by the tax authority seemed innocent - a request to confirm or clarify information relating to PAYE. However, given PAYE details provided to HMRC will demonstrate IR35 status, an IR35 enquiry would then follow. 

These tactics stopped abruptly around a decade ago. However, after two contractors who hold tax liability insurance with Qdos, were contacted by HMRC in July 2021 regarding their PAYE compliance, this approach is reminiscent of the one employed some time ago. 

It should be made clear that at this stage these PAYE compliance checks are yet to progress to IR35 enquiries - and may not ever. That said, given it was once a regular occurrence, it’s important that contractors realise this is a possibility. 


What if HMRC were to adopt this strategy again? 

So what would it mean if these two cases - and others that may follow - were to lead to IR35 investigations in due course? 

Above all else, it would prove that the tax office is still policing IR35 compliance among contractors despite the introduction of IR35 reform earlier this year. 

As touched on before, HMRC retains the right to investigate retrospectively, focusing on contracts that took place before the liability shifted as part of the changes. 


HMRC’s IR35 reform promise is a red herring 

The time period being reviewed by HMRC in one of these cases deserves a mention. 

Given one of these enquiries spans from July 2020 to July 2021, any subsequent IR35 enquiry may include several months of IR35 reform in the private sector being in force - this was introduced on 6th April 2021. 

But while HMRC have said they will not open an IR35 enquiry using information acquired through IR35 reform (such as a contractor transferring from outside to inside IR35 due to the changes), should this PAYE compliance check evolve into an IR35 enquiry, technically the tax office would not have broken its promise.

This is because the PAYE compliance check would have been the reason for contacting the contractor, not IR35 initially. 


Expert support essential 

It’s important that contractors are aware that HMRC are once again carrying out PAYE compliance checks among one person companies - activity that could lead to an IR35 investigation, as it has previously. 

Should this occur, it’s essential that all correspondence received by HMRC is handled by a specialist, given the significant cost of non-compliance. As part of a check, HMRC will likely issue a payroll and benefits questionnaire that the tax office insists must be completed prior to a telephone interview. At this point, it’s important that contractors contact an expert.

With Qdos’ Tax Liability Cover, you have expert representation from day one of an enquiry, in addition to financial protection should HMRC find that your contract belonged inside the IR35 legislation. For further information, get in contact with a member of our team.

 
By:Benedict Smith
 
 

IR35 Guidance

 

How to comply with the IR35 legislation

When it comes to complying with the IR35 legislation, you should consider the following steps:

  1. Review each engagement for IR35 status. This includes assessing both the written terms but also your working practices (the reality of the engagement) against the key factors above.
  2. Check that your working practices mirror what is detailed within your contract. The reality of the engagement holds more weight than the written terms so it is important to ensure your contract is a true reflection of the engagement.
  3. Keep a record of your due diligence. This could include copies of third-party contract reviews, a Confirmation of Arrangements and/or relevant correspondence which may help evidence your position.
  4. Ensure the relevant tax and national insurance is paid for your status. Being compliant with IR35 is often confused with being 'outside IR35', but compliance really just means paying the correct tax for your employment status. So if you are operating 'inside IR35' for an engagement, then a deemed payment must be made.
  5. Maintain up-to-date assessments of your engagements - ensuring reassessments throughout the engagement or if there are any material changes
  6. Keep an eye on relevant news for any changes or updates to how status is determined

Since April 2021, whilst it might no longer always be the contractor’s responsibility to determine their IR35 status, contractors should still be focusing on ensuring compliance within their engagements.

It is important to remember that the reform does not apply to any engagements with companies classed as small as per the Companies Act 2006 and contractors are still liable for any services provided prior to April 2021. See above for more information on who is responsible for IR35 compliance.

 

 

IR35 compliant contracts

 

An IR35 enquiry from HMRC will always begin with a request for copies of your written contracts relating to the accounting period in question, with proof of why you consider it to be outside of IR35. A robust contract may stop a full-blown investigation in its tracks, so it is essential to ensure compliance in this respect. A variety of status tests, outlined in this guide, are used to assess your contract, with no single test putting you inside or outside the legislation. Both the contract and working practices will require assessment as a whole using all of the status tests to determine your employment status.

​The contract does not need to be in writing - an oral or implied contract is legally binding if the parties intend it. The terms of the contract can be collected from the circumstances surrounding the engagement.

​It is not only your contract with a recruitment agency which may be assessed; in Usetech Ltd v Young the High Court decision made it clear that the "upper level" contract between the agency and the end client was to be considered in deciding the status of the worker, notwithstanding the terms of the agency's contract with the worker's Personal Service Company. Most contractors, however, will never see the upper level contract or have any rights to.

​HMRC will look to see if you have taken ‘reasonable steps’ to ascertain your status and so it is imperative to have each contract reviewed in order to display this. View our contract review services here.

Having your contract reviewed by an independent third-party expert, will give you a better idea of where your engagement sits in regard to IR35 status. While such a review gives you the IR35 status of that contract, however, in order to find out the overall IR35 status of the engagement you will also need to undertake a review of the working practices of that engagement.

Working Practices

 

The working practices of an engagement is how those services are provided in reality.

The written contract between the contractor and the end client could be perfect in terms of IR35, demonstrating key areas such as substitution, control, non-exclusivity and mutuality of obligation but this will also need to be proven in practice. Although the written contract remains important in determining status, should you be unfortunate enough to be subject to an IR35 enquiry, HMRC will look closely into your working relationship with your client.

​In an ideal world, we would like an IR35 friendly contract mirrored by the working relationship with the client.

If you are subject to a status enquiry by HM Revenue & Customs, the Status Inspector will normally want to obtain information from both you and the end client about the practical working arrangements of each engagement. This is known as constructing the "hypothetical contract" between the worker and the client. It is vital therefore that there is a clear understanding between you and the client about the nature of your day-to-day working relationship. This will also apply to situations where there is no written contract.

​We offer services for assessing your working practices, including a Working Practices Assessment and a free Confirmation of Arrangements document which can both be assessed by our consultancy team.

 

Why is IR35 compliance important?

 

Non-compliance with IR35 could leave you with not only the weighty cost of defending yourself against an enquiry from HMRC but also the potential burden of being saddled with the cost of any unpaid taxes should you be caught by the legislation.

Anyone can be investigated by HMRC, and should you be found to be inside IR35 but have paid tax as an outside IR35 contractor, you will be required to pay back the tax, interest and potential penalties as a result.

You should also bear in mind that an enquiry from HMRC is by no means a walk in the park, not only can these proceedings be extremely stress-inducing but they also have the potential to go on for a long time. The cost of defending yourself from an IR35 enquiry can very swiftly mount up if you don't have an insurance policy.

For services provided under the off-payroll working rules (i.e. in the public sector since 6th April 2017, or to a medium-large private sector business since 6th April 2021), you will not hold any liability as the contractor and it will be your client of fee-payer who will be subject to such an investigation in relation to these services.

 

 

Top 10 Tips for IR35 compliance

 

1. Have your engagements assessed for their IR35 status, by doing so you can evidence compliance with the legislation should your engagements ever come into question from HMRC. By opting for a mixed approach of both a contract and working practices review, you will have a clear picture of the reality of your engagement in terms of IR35 status.

2. Educate yourself about what IR35 might mean for your engagements and keep up to date with the legislation. By using the wealth of online articles available to you, you stand a better chance of ensuring compliance in the way you provide your services by simply knowing what could be classed as inside or outside of IR35.

3. Ensure communication within your contractual chain. By doing so, each party will know what they are accountable for. By keeping track of each other and the determination process it will be easier to make any necessary changes to better IR35 status.

4. Take care when checking that your working practices accurately reflect the written contract you have signed. Not only should you be actively monitoring the way you provide the services to ensure you are acting in a way that is compliant with the terms of your contract, but you should also be collecting evidence to prove this is the case.

5. Make sure you are providing services in a manner that is consistent with working outside of IR35 or pay the relevant taxes if not.

6. Collect evidence to show you are treated differently to your client’s employees. Examples of this would be a record of any relevant emails or other forms of contact with your client.

7. Look for contracts that are outside of IR35 at their very base level, in other words, project-based contracts rather than time-based contracts. Always have a good read of the contract before signing. Another example of this is that you should look to see that you are not individually named within the contract and are only referred to as a business.

8. Seek to attain a Confirmation of Arrangements. Having a CoA signed by your end client greatly increases your chances of successfully defending yourself from an IR35 enquiry. For more information on what a CoA is and how to attain one, see here.

9. Show you operate a genuine business and that you are not part in parcel of your end client’s company. Examples of this would be investing in stationery for your business, such as letterhead paper, or simply wearing an ID badge when attending your client’s site.

10. Have proof that you have taken financial risk on behalf of your business. Examples of financial risk would be holding relevant business insurances such as Professional Indemnity Insurance or Public Liability Insurance. Both of which we can provide for you here at Qdos.

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