Time to Take an IR35 Reality Check

To decide whether you are inside or outside the scope of the IR35 legislation, HMRC will look to determine whether you are acting as a genuine business or like an employee of your end client.

The process of this will start with your written contract, which will be assessed for its compliance with the legislation. Each relevant clause is scrutinised and the whole contract will be looked at as a whole to see whether it appears to be a genuine business to business contract or more that of an employment contract.

However, HMRC have a problem with this. Being that a disguised employee could easily have a robust contract but work completely differently in reality, the written contract is only good for so much; they must look deeper. This is where the ‘working practices’ come in, which refer to the day-to-day working relationship you have with your end client, i.e. how you work in reality.

With the written contract generally being the only official agreement between the parties, working practices tend to be something often overlooked and notably more difficult to prove. On top of this, they tend to hold more weight in an IR35 investigation, as where there are discrepancies with your contract, the contract will likely be considered worthless. For example, if your contract states that you must work at least 40 hours per week, but in reality you don’t, HMRC might then consider that if this isn’t true, what else isn’t? For this reason, it is paramount that your working practices mirror the terms of your written contract.

The same considerations will be made for your working practices as your written contract, such as your right to provide a substitute, the level of autonomy you have over your method of work, whether a mutuality of obligation exists, whether you use your own equipment, and so on.

So how will HMRC check your working practices? Simply by asking. HMRC have made it clear that they will use their powers to complete an investigation as early as possible. One of their key ways of doing this is to question your end client. This can be detrimental for you as often the person they ask is not aware of some of the terms of your agreement, such as the manager of the department who you report to who doesn’t understand your right to substitute, or a member of HR who doesn’t realise that you are left to your own devices when it comes to how you operate.
They may also request an interview with you, although we do not recommend accepting these requests as you are in no way obliged to and they can often be damaging to your case. You will not be provided with the questions of the interview beforehand and therefore cannot form a well-constructed response. Simply politely decline and insist upon dealing via written means.

Having a confirmation of arrangements document signed by your end client is a good way of ensuring they both understand the terms of your agreement and how you work, and puts something in writing to give to HMRC in hope that it will close down the case. This document is not legally binding but confirms your real working arrangements with your end client in writing. It should be signed by somebody of authority who you deal with regularly. Not all end clients are willing to sign this document and only light pressure should ever be applied. In the face of denial, try and seek verbal agreement so that you can at least feel confident that they will answer HMRC favourably in the event of an investigation.

In summary, ensure you have a compliant written contract and that your working practices mirror its terms.

By:Jane Hailstone

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