Contracts and Working Practices
In this article, I will be addressing the initial stages of an IR35 enquiry as well as the importance of reviewing your working practices and written contract. The best position a contractor can be in is to have compliant assessments of the contract(s) and working practices as well as obtaining the relevant insurances.
During the initial stages of an IR35 enquiry, most contractors will receive an opening letter from HMRC inviting them to explain why they believe they are outside of IR35. Should the contractor be able to provide such evidence, then this may be sufficient enough to satisfy HMRC. If the evidence isn’t sufficient, then HMRC’s first step will normally be to assess the main terms and conditions of the written contract(s).
The contract sets out the agreement between the limited company and the Employment Business/End Client and therefore we do stress the importance of having your contract reviewed by an IR35 specialist. This will not only advise you as to your IR35 status but will demonstrate that you have operated due diligence by seeking the advice and confirming your status.
As mentioned above, the best position a contractor can be in is to have both compliant contracts and positive working practices, but what if this isn’t you?
If the contract is deemed to fall outside of IR35 but doesn’t reflect the working reality of the contractor, this could reduce prospects in defending an IR35 enquiry as HMRC would argue that the contractual clauses do not reflect reality and therefore carry no weight.
One of the most common questions we are asked as IR35 specialists is “if my contract is reviewed and the opinion is that it falls within IR35, does this mean I am caught by the legislation?” The answer to this would be, not necessarily.
As often, contracts are templates that are given out to many contractors, it is unlikely that the terms and conditions would accurately reflect the way in which each contractor works. If a contract fails in our opinion, then we as IR35 specialists will always do our best to liaise with the Agency/Client to gain the strongest possible contract. Agencies/Clients aren’t always willing to make amendments on an individual basis. This is where the working practices would be taken into account and ultimately, would take precedent. Therefore, it is possible to have a failed contract and be compliant as long as your actual working practices are strong from an IR35 perspective.
In an enquiry, once the contract has been analysed by HMRC, they may then contact the End Client to determine the actual working practices.
The working practices review still applies the key tests just like a review of the written contract. When determining IR35 status key tests such as Personal Service/Substitution, Control and Mutuality of Obligation will be addressed. We will also take into account other aspects such as taking a financial risk and whether or not you are part and parcel of the client’s organisation.
In our experience of dealing with enquiries, the working practices weigh more heavily than the contract itself as this will reflect your actual working relationship with your end client. A working practices review is always advisable alongside a contract review to ensure that your actual working practices are compliant with regards to IR35 and if possible, signed by your end client to demonstrate that they are agreeing to the way in which you are providing your services.
Although we can never guarantee a successful outcome of any HMRC challenge, having strong compliant working practices would be a useful piece of evidence in the event of IR35 enquiry.