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How can contractors best protect themselves from IR35?

3 simple first steps contractors should take in order to protect themselves from IR35.

The Intermediaries Legislation, more commonly known as IR35, was implemented in as part of the Finance Act in 2000 in order to target perceived ‘disguised employment’. Disguised employment refers to the act of using a limited company as a mechanism for paying less tax. A clear and often referenced example of disguised employment is of a person leaving their PAYE employment on any given Friday and returning to the same role on the following Monday as a contractor. HMRC saw an increasing number of people working under this guise and, therefore, introduced the IR35 legislation in order to combat this perceived tax avoidance and ensure that contractors who were acting as ‘disguised employees’ paid the correct amount of tax.

Ensuring you and your business are protected from IR35 is by no means a walk in the park, however, there are a few options at your disposal to help the process run smoothly. Let’s take a look at the simplest ways to ensure compliance with the infamously tricky legislation.

 

HMRC’s enquiry process

During an IR35 enquiry, your contract will be HMRC’s first point of call. They will look at the contractual documentation between the parties and assess whether the contract is, in their view, IR35 compliant.

After reviewing the contract, HMRC will want to delve a little deeper into the actual working arrangements. They will ask the contractor a number of questions as to how they work on a day-to-day basis. It is then likely that they will want to speak to the end client with regards to these working practices to confirm their view of the day-to-day working practices.

They will touch upon any parts that allude to IR35 status tests such as personal service/substitution, control, mutuality of obligation. They will want to get to the bottom of how you, the contractor, work day-to-day and whether it is truly reflective of genuine self-employment. Whilst the contract may be IR35 compliant, if the client's comments around the working practices are contradictory to the terms of the contract, HMRC will tend to favour the clients view of the working arrangements.

 

Contract reviews

When assessing the contractual terms of an engagement, HMRC will look at all the key IR35 status tests as set out in the case of Ready Mixed Concrete v the Minister of Pensions (1968). For a closer look at these all-important status tests and how they are viewed through the eyes of an IR35 assessor, take a look at our IR35 Compliance Guide.

HMRC will look to establish if these employment status tests are addressed within your contract and whether they point towards disguised employment or genuine self-employment.

Whilst there are other factors, such as the actual working practices, that will hold a much greater weight over any contractual terms, we would always advise your contracts are as strong as they can be from an IR35 perspective. As such, we recommend that you have your contract(s) reviewed by a company who specialises in this area of tax legislation.

 

Working practice reviews

Whilst having a contract review is important from an IR35 perspective, when looking to understand your IR35 status, HMRC will place a much greater emphasis on the actual day-to-day working arrangements.

It is important to note that contracts are often generic and sent out in bulk to many contractors all working for different end clients. Therefore, your working practices will not always mirror the written terms. Because of this, it is crucial that your working practices are assessed. We need to make sure that both your contractual terms and your working practices reflect those of a genuinely self-employed contractor.

While it is important that your working practices reflect your contractual terms, ultimately the working practices of any engagement will hold more weight in the event that HMRC carries out an IR35 investigation. As such, you should always seek to have your working practices assessed by an independent third-party expert.

 

IR35 insurance

The importance of having adequate IR35 insurance in place should not be underestimated. Remember that IR35 enquiries can be lengthy, stressful and costly. Without the guidance of an expert in this specialist area of tax legislation, they can also be extremely difficult to defend.

With our Tax Liability Cover (TLC35), you get the safety net of a comprehensive IR35 insurance policy specifically designed to protect you in the event that HMRC opens an enquiry into your accounts. Different kinds of IR35 insurance offer you differing levels of protection. Our TLC policy covers a broad range of enquiries, including IR35 enquiries, PAYE disputes, and VAT disputes. With claims handled by ex-revenue inspectors, TLC offers coverage for any tax/NIC liabilities, interest, and penalties should you be found ‘caught’ by the IR35 legislation. An additional perk of our TLC policy you can look forward to is the inclusion of unlimited IR35 assessments.

 

Here at Qdos we offer all of the aforementioned services. From contract and working practices reviews to IR35/Tax investigation cover, all are available on our website and can be found through the IR35 Advice Centre. If you require any further information or guidance, a team of dedicated experts are on hand to assist you with all of your IR35 needs. Feel free to contact us so we can get the ball rolling.

By:Sophie Withers

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