IR35 is a complex piece of legislation. As of December 2014, the law has been in existence for nearly 14 years, but even now there’s a lot of doubt and misconceptions among contractors regarding IR35. In this article, we look at the common misconceptions about IR35 among Limited Company contractors. We continue the series with the example of Tim, a fictitious contractor.
Tim’s contract has clauses related to substitution. Also, he has got his contract reviewed by an IR35 agent, who says the contract doesn’t pose any IR35 risk. This means Tim is outside IR35.
While this is a very common misconception, most people don’t know that simply having an IR35-friendly contract doesn’t eliminate the risk of being inside IR35. If the working conditions are not IR35-friendly or not in line with the clauses in the contract, then the contract alone won’t help.
Example 1: During an IR35 enquiry, HMRC can talk directly with Tim’s client. While the contract has clauses related to substitution, the client may say Tim is not allowed to send a substitute. In such a scenario, HMRC will not regard the clauses in the contract but will rely on the client’s statement. In worst cases, because of this difference between the contract and the working conditions, HMRC may disregard the entire contract, including any genuine clauses.
If a contract allows Tim a right of substitution, it is advisable for him to get a written confirmation from the client in another document. This way he will be saved even if the client says something unfavourable to the HMRC from an IR35 perspective. Written confirmation is also helpful where the HMRC is looking back at contracts of several years ago. Such clients may not remember Tim’s actual working conditions and may unintentionally give wrong information to HMRC, which can land Tim in trouble.
Tim should also take precaution when taking any business or legal insurance protection, and provide a true and accurate picture of his working conditions. If there’s IR35 investigation, and Tim has provided an incorrect picture of his working conditions to the insurers, they won’t pay him anything. It is advisable for Tim to take insurance that covers not only HMRC’s review of the contract but also a review of the working practices.
Tim works on a single site for a long period, and so he will come inside IR35.
The risk of Tim being caught inside IR35 is not related to how long he is working on a single site. Instead, the IR35 risk is dependent on the everyday working relationship between Tim and his client. There’s no denying that if Tim works at a single site for a long period, and if there’s an IR35 enquiry, Her Majesty’s Revenues and Customs (HMRC) may use it against Tim. However, if Tim is clean on the other parameters such as substitution clauses, financial risks, and billing, he won’t be at a risk by working at a single site for long.
It doesn’t matter whether it is a single long-term contract or several regularly-renewed short-term contracts. If every short-term contract has a clear start/end date, and the contract allows Tim to take up other contracts at the same time, the IR35 risk is minimized.
Also, some people wrongly believe they will come inside IR35 if they work at a single site for more than 2 years. This confusion stems from HMRC’s 24-month rule, which relates to claiming of travelling expenses by temporary workers. However, the 24-month rule has nothing to do with IR35.
If Tim is caught inside IR35, he cannot claim any expenses.
It’s true that if found inside IR35, Tim cannot claim all expenses he could have claimed as a contractor outside IR35. However, he can still claim some expenses as listed below:
As per HMRC rule, the 5% allowance is for certain business expenses, such as training, stationery, the cost of winning new contracts, etc. There’s no need to show any proof for this 5%.
Tim has more than one contract at a single time so he is outside IR35.
Even if Tim has more than one contract at a single point of time, it doesn’t mean he is outside IR35. While multiple contracts at one time may help Tim in his claim of being a genuine contractor, it should be noted that IR35 is applicable to every individual contract. Out of the several contracts, if the working conditions of any one contract are geared towards employment, the contract will come inside IR35.
Tim works on the client’s site and uses client’s equipment. So Tim is inside IR35.
This is not true. Many times businesses may have genuine reasons for asking contractors to work on their site and use their equipment, and not the contractor’s equipment. For example, if Tim is in a contract with the Ministry of Defence or if Tim is a construction contractor, he will have to work on the client’s site. However, if the client has uniform rules for all their contractors, which make it compulsory to work only at the client’s site and use their equipment, such a contract can be considered as outside IR35.
If Tim opts out of the Conduct Regulations, it is a sign of control and this may go against him in an IR35 investigation.
Most agencies want contractors to opt out of the conduct regulations, which are aimed at providing workers with some minimum standards. For instance, if the client goes bankrupt or doesn’t pay, the agency won’t be under any obligation to pay if the client has opted out of the Conduct Regulations. Therefore, some agencies present an incorrect view of conduct regulations to safeguard their own interest.
In reality, there’s no correlation between opting out of Conduct Regulations and being inside or outside IR35. Note if Tim has met the client prior to signing the contract, then his status is ‘opted out’ by default.
Tim is required to work for a set number of hours every day or week, and so he is inside IR35.
Many clients set working hours for contractors for various reasons. For example, some clients may not allow contractors to work beyond a certain number of hours to avoid any health and safety trouble. At other times, it could be a business requirement that contractors work during specific time slots. Also for many contracts, the payment rate is based on a single working day so the working hours are set by default.
However, set number of hours are not a problem from an IR35 perspective. What could be a problem are clauses like fixed lunch hours, fixed number of holidays, sick pay, and other features similar to full-time employees.
All contractors in the client site are outside IR35, so Tim is also outside IR35.
It’s a bad idea for Tim to determine his own IR35 status based on the status of other contractors at client’s site. It is highly likely that their contracts are totally different from Tim’s contracts. Also, it is possible that the other contractors are not be allowed to share full details of their contracts due to confidentiality agreements.
And even if the contracts are similar, Tim has no idea if the other contractors have some other documents like a Confirmation of Arrangements letter, which reduces their IR35 risk.
The court will not accept the argument that other contractors at a similar location are outside IR35. Also, even if some contractors share their IR35 status with Tim in private, they are unlikely to come to his defence during an IR35 enquiry.
This shows why it is important for Tim to get an IR35 review of his own contract and working practices, irrespective of the IR35 status of other contractors. After the reviews, Tim should maintain all evidence that shows him as being outside IR35.
Tim doesn’t receive any holiday or sick pay and so he’s outside IR35
If Tim is receiving holiday or sick pay, he’s clearly outside IR35. But not receiving holiday or sick pay is not enough evidence that Tim is outside IR35 because there could be other clauses in Tim’s contract that may increase his IR35 risk.
If Tim is inside IR35, it is best to work through an umbrella company.
Umbrella companies have many advantages, such as no hassles of running a Limited Company or no tax and accountancy issues faced by other Limited Company contractors. However, contractors who work through an umbrella company are required to pay taxes and National Insurance similar to full-time employees. Many contractors believe once they are caught inside IR35, it is better to work through an umbrella company because they are going to pay tax irrespectively.
However, that’s not correct. Simply because Tim is caught inside IR35, it’s not a good reason for him to work through an umbrella company.
Even if Tim is caught inside IR35, running his own Limited company will be more beneficial as opposed to working through an umbrella company. For example, Tim can still take advantage of the flat rate VAT scheme, or he can use the Employers Allowance related to National Insurance contributions. Umbrella Companies are about convenience and best for short term contractors, a limited company will always provide you more take home pay.
Tim is designated as a Manager, so he must be inside IR35
If Tim is managing a project, and thereby managing all the internal and external resources involved in the project, it does not mean he’s a part of the management. It could be because of Tim’s expertise in a particular area that he’s been made as a manager of a short-term project. This is different from an in-house line manager who has several other management responsibilities such as performance management, revenue targets, etc. As long as Tim’s management powers are restricted to the project, he need not worry about any IR35 risks.
One of Tim’s clients is also an ex-employer, so this increases his IR35 risk.
It’s true that such an arrangement will be seen with a lot of suspicions by HMRC. Arrangements like these were one of the primary reasons why IR35 came into existence. However, this will not be the only criteria for considering Tim as being inside IR35. Various other parameters will come into the picture for determining Tim’s IR35 status, and some of these are listed below.
If some of these factors clearly establish Tim’s status as a self-employed contractor, his IR35 risk is reduced even if he’s working with his ex-employer as a contractor.
As you can see, there are many misconceptions around IR35. At times, people may think of something as a very serious IR35 issue, but in reality the risk will be minimal. However, at other times, contractors may consider something as trivial, but it could pose a major risk from an IR35 point of view. This could lead to a high amount of taxes and National Insurance, and in some cases, even penalties.
To avoid any such risks, we your to take our Business Entity Tests. The tests will show your IR35 risk in an easy-to-understand and graphical format.