There are several factors that influence the IR35 status of contractors. Some of these factors include control, business risk, mutuality of obligation, and so on. If there’s an IR35 enquiry, Her Majesty’s Revenues and Customs evaluates all these factors from two perspectives -- the actual contract and the contractor’s working conditions.
Contractors are often confused with various working conditions in relation to IR35. In this article, we look at some working conditions, which can confuse the contractors from an IR35 point of view.
We use the example of Tim, a fictitious contractor, to better understand these scenarios.
Client wants Tim to work from the client’s office to facilitate better supervision
Tim has all the latest equipment at his home office, and he can perform all the requirements of the client’s project from his home. However, the client wants Tim to work out of his office simply to keep a regular check on his activities.
This situation poses a high IR35 risk as it represents control similar to what an employer may have over a full-time employee.
However, there may be cases where Tim is required to work out of the client’s office, either because of a business need or for security/confidentiality reasons. Such cases are not a problem and may not be seen as control by the client.
Tim’s client asks him to fill up an additional timesheet
Tim’s client wants him to fill up a timesheet that includes the details of all projects completed by Tim for the client. This timesheet could be in addition to the one prepared for a recruitment agency -- that is if Tim is using a recruitment agency.
Filling up a timesheet for a client does not pose much of a risk to the contractor in an IR35 investigation. Because, this is not necessarily seen as a sign of ‘control’ by the client. In fact, this could be advantageous and can serve as proof that the contractor is working on a project basis, is and not working as a full-time employee.
Client is asking Tim to work at specified hours
Tim is an early-riser and prefers to start his workday early. He goes to the client’s site at 0700 AM and leaves at 0300 PM after completing all his work. Because Tim’s timings are different from the other full-timers working at the client’s site, the client insists Tim should adjust his timings to match the timings of other employees.
The IR35 risk in this situation depends on the agreement between Tim and his client at the contract stage. It is possible that Tim’s client has included some terms in the contract, which require Tim to work the same hours as his other full-time staff because of business requirements. In such a scenario, the IR35 risk is minimal.
However, let’s say the client is asking Tim to work regular hours simply because he doesn’t want the full-time staff to raise questions or get negatively affected. If the client’s request is because of such reasons, this will be considered as control and will go against the contractor in an IR35 enquiry.
Some additional work has come up, and the client expects Tim to take this up
While Tim is in the middle of his contracted project, client wants him to take up some other work. This additional work could be something that is either not Tim’s specialty or it could be work for which the client has other specialists. In any case, this work is not a part of Tim’s contract with the client.
If Tim takes up ad hoc work, which is not a part of his contract, it will put him at a great risk from an IR35 point of view. As a contractor, Tim bears the financial risk of any downtime on his projects, and this risk is a big differentiator between a contractor and a full-time employee. If at all Tim undertakes some additional work, it should be treated as a different project and should be a part of a separate contract.
Client expects Tim to attend team meetings or team events
A client is asking Tim to attend their monthly review meeting. Also, the client asks Tim to be a part of team-building activities.
Tim should not attend any internal events that are exclusive for the client’s full-time employees. Because this could create a perception of Tim being a part of the organization. A similar problem could occur if Tim participates in staff meetings or is a part of the subscription list for staff magazines or internal newsletters.
Client provides an employee handbook to Tim
A client may ask Tim to attend an induction presentation or may provide him with some handbooks that are meant only for employees.
Tim should know that employee handbooks are meant only for employees, and not for contractors. If at all, Tim gets an induction it should be related to his project and should only include information that is essential for him to perform his duties. Otherwise, Tim faces the risk of being a ‘part and parcel’ of the client’s organisation. Along these lines, Tim should be treated like any other external visitors in terms of office entry/exit formalities, name tags, etc.
Client wants Tim to sign paperwork related to NDA and ISO
Client wants Tim to complete paperwork such as NDA (non-disclosure agreement), ISO, and other similar policies. This paperwork is primarily created for client’s full-time employees.
If Tim signs any documents or paperwork that is meant only for employees, it poses a big IR35 risk. It’s not as if all NDAs are a problem. For example, a client may want the contractor to sign an NDA due to a business need or to ensure security of data. If this document is signed by all contractors working with the client and is different from the NDAs signed by employees, the IR35 risk is minimized.
If the client doesn’t have separate forms for contractors and insists on signing the same form meant for employees, Tim can lessen the IR35 risk by signing the form on behalf of his Limited Company.
Client does not provide a Confirmation of Arrangements (COA) document
Tim has requested a CoA document because there has been a change in the client’s representative. In such situations, a CoA document is considered to be a good safeguard from an IR35 point of view. However, his client has refused.
While the absence of a CoA document does not pose any IR35 risk to Tim, having a CoA can be very useful if there is an IR35 enquiry. The CoA documents include all the details about the arrangement and eliminate the need for a meeting between HMRC and the client for confirming the arrangement.
Client wants Tim to use an internal email address that has the client’s company name
Let’s say the client’s company is called XYZ Corporation. The client wants Tim to use the company’s email address tim@xyz.com for all internal and external emails. This email has been set up exclusively for Tim, and other than his name the email id is similar to other full-time employees of the client’s company.
It is not unusual to use a common email server for both employees and contractors. However, to avoid any IR35 risk, Tim should be clearly mentioned as an external contractor in any email address directories. Also, Tim’s designation should not be similar to full-time employees. Similarly, Tim’s e-mail signature should leave no doubt that he is an external contractor and not a full-time employee.
After completion of a project, a client asks Tim to continue till he finds some other projects.
The client wants Tim to continue with his company, even after their contracted project is completed. The client’s company is even ready to pay Tim his usual hourly rate till they find some other projects for Tim. This waiting period is expected to last for several days after completion of the project.
In another scenario, Tim is volunteering to complete the project faster without any extra pay so he can take on other projects. But the contractor is asking him to continue until the term and doesn’t mind paying extra.
If Tim is being paid without working, it represents mutuality of obligation. Such an arrangement is common for full-time employees but not for Limited Company contractors. This was one of the premises behind the famous ‘Dragonfly’ case, in which the contractor was found to be inside IR35 and had to pay £99,000 in penalties to the HMRC.
However, such an arrangement may be acceptable sometimes if there’s a short and unavoidable delay in starting the project.
Client is calling Tim to their annual Christmas party
Tim’s point of contact in the client’s company has invited Tim to the company’s annual Christmas party. One of the objectives of this party is that the client’s company wants to thank employees for their work during the year.
If Tim attends the annual Christmas party, this factor alone will not go against him in an IR35 enquiry. But if there are several other factors going against him, then this factor may contribute to HMRC’s suspicion and increase Tim’s IR35 risk.
As a best practice, Tim should determine whether or not to attend such an event on the basis of other invitees of the event. If the event’s other attendees include non-employees such as clients, spouses of employees, ex-employees then there’s no harm in attending. However, if Tim knows the event is exclusively meant for employees, it’s better for him to decline the invitation politely.
As we have seen, there are several instances where client expectations can put contractors at risk if there is an IR35 enquiry. Note, however that all of the above issues are not equal in terms of risk.
Contractors need to be cautious about instances where the client is willing to pay even without working on the contracted project for some time. This could be in the form of assigning some other work, or paying them even after completion of the project in anticipation of new projects. If there’s an enquiry, the other scenarios may make it difficult for contractors to prove their status as an independent, self-employed professional. However, in isolation, attending a Christmas party or an induction program is not so risky.
It is important to note that clients may not always support contractors in IR35-related issues. If a contractor is found inside IR35, he will have to pay extra taxes and penalties and not the client. The client may have to spend time to respond to HMRC’s requests, but there are no financial implications. So it’s the contractor’s responsibility to know where to draw the line.
To avoid such trouble, an agreement at the beginning of a project can be very useful in such matters. If the contractor has a good working relationship with the client, both of them can even make an informal agreement. If the contractor explains the situation properly, most clients won’t mind if contractors don’t attend the Christmas party as long as they are completing their work as per expectations.
As a contractor, if you don’t take precaution in these matters, you run the risk of coming inside IR35, and this can lead to serious tax implications.
Use our IR35 calculators to understand how much your take-home pay is reduced by being inside IR35 as opposed to being outside IR35.