Mythbuster Maze: The truths and myths about IR35 – Part 2

If you haven’t been with us for the start of the maze, you can read part 1 here.

Without further ado, we’ve got a world of puzzles to solve in the maze that is IR35.

First off, we’ve been cornered: What’s the point in contract reviews that are not guaranteed?

This is a common question which has often been asked and many contractors choose to go without a contract review because they do not believe it is going to help them in any way at all. First, let’s look at why, as an industry standard, contract reviews are not guaranteed.

IR35 legislation is based on historic case law which is inevitably open to different interpretations. The status tests such as the right of substitution and control etc, which have been developed from this case law can incidentally also be interpreted differently and it can change with each high-profile case which is what makes IR35 so unclear. Even within HMRC, you will have different opinions depending on the inspector. As IR35 is so opinion-based, with no black-and-white testing, no contract review can be guaranteed, as it is done to the opinion of the reviewer (which is why it is important to have a review by an experienced professional – although we are a little biased).
So why then, is it still important to have a contract review completed? Primarily, you’re going to need an indication of whether you are inside or outside the legislation to know what salary and dividends you are going to pay yourself and whether you need to pay a deemed salary* or not. Secondly, let’s say you didn’t get it checked and you decided “I’m fine, they won’t look at me anyway” and then they do, and you were wrong. Now I know you’re probably thinking “ha! I’m never wrong!” But, think back, you probably have been at some point, the chances are there. If you are then caught by the legislation, you will be expected to pay the liabilities plus interest back as well as a potential penalty which can be anywhere between 0% to 100% of those liabilities. Here’s the simple part, get your contract reviewed and you’ll be looking at less penalties. Reviews are inexpensive in the grand scheme of things and good save you big bucks if you were caught. HMRC quote on their penalty statement that “if you, in your capacity as employer, act prudently by taking all reasonable steps to understand and ensure that your intermediary service company or partnership meets its obligations under the service company legislation, no penalty will be imposed should an incorrect return (P35) be submitted.”

 

Another twist: are you safe if the contract is considered outside? Not quite. Don’t celebrate just yet, as there’s more to IR35 than the contract. The way you work on a day-to-day basis (commonly referred to as your ‘working practices’) has as much, if not more importance in determining your employment status than your contract. Although having a contract review is important, as explained above, and is the first point of call when determining your status before you start work, your working practices will ultimately decide your status. They must ‘mirror’ the contract , meaning that if there is a clause stating that you have the right to substitute, then you must truly have it or if you must work at the client’s site but you don’t, the Revenue may question what else is untrue and render the contract worthless. You can read a real-life case of this here.
Whilst working on each contract, you should regularly review your working practices as you can go from being outside IR35 to inside within the same contract. Any changes in the way you work should trigger a review. You can find points to consider here.

This leads on to a very similar misconception. If you consider yourself clearly outside the legislation (having considered both the written contract and working practices), then you are fine. The accounts that HMRC look into tend to be random or they may do a check on all the contractors a particular firm used if they found that one of them was ‘inside IR35’, so there is still a chance of being investigated, regardless of whether you consider yourself inside or outside the legislation. You must also consider some of the tactics the inspector may use to try and trip you up, such as leading you into using ‘employment language’ such as ‘overtime’ or ‘line manager’. We are an insurance broker and therefore a little biased, so I am only going to say this once; we recommend, therefore, that all limited company contractors take out some level of insurance in order to get, at least, some professional backing in the event of an enquiry or some indemnity for losing a case as well. You can have a look at those available here. The point is, anyone can be investigated.

 

You think you’ve got an easy decision on the next turn: can HMRC dispute a clause in the contract that states that you are not an employee of the company? This clause has been put into many contracts since the legislation was implemented, most commonly found in standard contracts with recruitment agencies. It has been entered as a precautionary measure to protect the agency’s or end client’s financial interests (you will often find it accompanied with a clause placing all responsibility of tax payments and any liabilities, penalties etc on the contractor).
It is essentially a worthless clause, as contractors are responsible for their taxes, and any penalties etc will be paid by the contractor if they are caught by IR35. HMRC are not going to pay any attention to a clause in your contract that says you are not employed by your end client. The whole point of IR35 is that the Revenue want to find the ‘disguised’ employees. It would be like a burglar holding up a sign to the police that said ‘it wasn’t me’ whilst wearing a balaclava and holding a bag of expensive jewels. Lest we say, it would be ignored. Don’t let a clause like this put a smile on your face and pull your attention from the clauses that really matter, as it’s not going to help you.

 

Well that ties up round two of the truths and myths surrounding IR35. Join us next time for more, and remember, if there are any topics you would like to see mentioned here, let us know by leaving a comment below.

 

*A deemed salary is the salary of an employee paid by a contractor i.e an increased tax payment. If you think it might apply to you, then you will need to discuss it with your accountant.

By:Sam Greenwell

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