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IR35 is tax legislation aimed at countering tax avoidance, and specifically targets limited company contractors. If caught by IR35 you could lose out on thousands of pounds worth of income every year to the taxman.
Many unwary contractors fall into easily avoidable traps that provide grounds for HMRC to investigate their IR35 status. For contractors without the back-up to fight their cases, they can find themselves at the mercy of the taxman – having to accept harsh judgments for back taxes, interest and penalties.
The very best IR35 advice to limited company contractors is not on how to win cases against HMRC, but how to avoid an IR35 investigation in the first place. Dave Chaplin, CEO and founder of Contractor Calculator, a leading website for freelancers and contractors gives his top 10 IR35 traps to avoid.
You need to avoid any suggestion that your client controls you. The issue of control in IR35 cases has become key in determining ‘disguised employment’ since the Dragonfly IR35 ruling. Only carry out the job you were hired to do and the tasks detailed in your contract, and certainly never let your client move you from task to task or instruct you how to complete your work.
The power to provide the client with a suitably qualified substitute is a clear indicator that you are not employed by your client and will keep you outside IR35. Aim to include a right of substitution clause in your contract or, even better, actually sending a substitute during the contract, will send a clear message to HMRC that you are, in fact, a true contractor. Get your legal adviser to negotiate a proper unfettered substitution clause in the contract and ensure that the client agrees to this in reality.
Make sure you aren’t personally named in the contract, nor in any correspondence relating to it, as this could identify you as having to provide the services personally and therefore very likely to be inside IR35. The implication is that you are providing your services under an employment ‘contract of service’. The contract should be with your contractor limited company, proving you are providing ‘contract for services’ as a business-to-business service provider.
Taking on any work that the client offers, and not just the tasks agreed in the contract, suggests that your client is obliged to offer you work and you are obliged to take it. This is called ‘mutuality of obligation’, or ‘MOO’, and is a strong indicator of employment and is likely to put you inside IR35. Only complete work agreed in the contract and, if alternative work is offered, either refuse to do it or get a fresh contract or contract addendum issued. Strictly avoid termination notice periods that require the client to give you work for that period.
Appraising your client’s personnel, or taking part in your own appraisal with your client suggests that you are ‘part and parcel’ of the client’s organisation. HMRC is likely to infer that you are not in business on your own account and are, in fact, a ’disguised employee’ and therefore inside IR35. Never conduct appraisals don’t allow yourself to be appraised – that’s what happens to employees, not contractors.
Contractors should be careful how they manage holidays and time off. Informing your clients ahead of time that you are not going to be available is a professional courtesy to ensure that your client is not inconvenienced and can plan for your absence. However, you should never ask for permission to take holidays or time off sick, nor should you accept payment for time off, as this suggests that you are being controlled by the client and receiving the sort of benefits that employees receive. That is likely to put you firmly inside IR35.
Whilst it is sometimes necessary to be branded by the client’s identity, and security or logistical reasons require you to have a client network log-in and email account, these should be avoided wherever possible as they suggest you are ‘part and parcel’ of the client’s business, and therefore inside IR35. You must avoid becoming part of the furniture and need to stand out from the employees.
If your client insists in the contract that you cannot work for other clients at the same time, this suggests that you are not in business on your own account and are potentially a disguised employee, and so inside IR35. Get your legal adviser to negotiate out any clauses restricting your business in this way. The only exception is when your client insists you cannot work for any of their competitors for a given time – this is a common feature in business-to-business contracts for services.
If you allow your client to pay for training, this strongly suggests that you are ‘part and parcel’ of the client’s workforce and a disguised employee. As someone in business in their own right your limited company should pay for all of your training and development.
Avoid becoming ‘part and parcel’ of their client’s organisation. Don’t use staff facilities like subsidised canteens or gyms, staff parking or even staff entrances. It might be inconvenient, but make sure you use the visitor’s car park, that you sign in every day, just like a visiting contractor would be expected to, and never, ever organise the Christmas party!
*Dave Chaplin is CEO and founder of Contractor Calculator, an online resource for freelancers and contractors. He is also the author of Beat IR35: The ultimate guide to IR35 for contractors, agencies and clients available here. The book provides readers with all the expert knowledge they need to stay compliant, reduce tax risk, avoid punitive IR35 taxes and successfully combat any HMRC investigation.