IR35 status is based on several factors, and with care and forethought it is possible to set up your business and your relationship with the client in such a way that any contract is more likely than not to be outside IR35. Some of these have to do with the specifics of an individual contract – distinguishing you from an employee of the client. Others concern the way your company is set up in general – showing that you are “in business on your own account”.
The aim in preparing yourself for IR35 is to show that you are a “genuine” business and not simply using a company as a vehicle to pay less tax. It is clear from the case law (both victories and defeats for HMRC) that tribunals consider actual working practices as more important than the written contractual terms, so you should aim for this to be genuine, not simply for show. Many elements of this will make your business model more efficient and allow for stronger trading, so achieving a double effect. To this end, approach the following points with the frame of mind “how does a genuine business operate?”
- Does the company market itself to potential clients?
When was the last time you did business with a company which had no website? Wouldn’t you expect business emails to come from a business domain, rather than Gmail or Hotmail? A surprising number of contractors do no marketing at all, beyond circulating a CV when they are looking for a role. Marketing for a contracting company is as simple and cheap as a website outlining your services, with case studies of successful projects completed. Buying a domain name that matches your company name will also provide you with a professional-looking business email address, so that when you apply for roles it is clear that it is your company and not you personally that is applying.
- Is the contract for services or specifically your services?
To be outside IR35, contracts should be for your company to provide services. This follows the principle that your company should act in the same way as any other company. When you book a flight with Virgin, you are not booking Richard Branson to fly you personally, but for his company to perform that service. If the contract specifically states that you will perform the required duties this can indicate that the relationship is one of employment
- Are you entitled to supply a substitute?
When an employee calls in sick to work, his employer has no right to demand that he find a replacement and pay them out of his own pocket. Likewise if he wants a day off he has no right to send a replacement along to do his job. Since a contractor’s engagement should be for their company to supply services, rather than for their own time and effort, your contract should specify a Right of Substitution, you can send, and your client can expect a suitably qualified substitute in the event of your absence.
- Are you able to supply a substitute?
Standard contracts have specified a right of substitution at least since the introduction of the Intermediaries Legislation in 2000. One question that could arise in the event of a challenge to your IR35 status is whether this is just a paper clause, or whether you could actually follow through and provide a replacement. There are two elements to this; firstly will your end client accept a substitute? If your substitution clause allows the client approval over the replacement you sent this weakens your position and indicates that you are an employee. To have full effect your right to send a substitute should be unfettered.
Secondly could you actually send a substitute? Particularly at short notice, e.g. if you are sick, where would you find somebody with the appropriate skills and if necessary security clearances to fill your role? If you have not even got a plan in place it is possible for HMRC to argue that the clause is a sham, only included as part of a box-ticking exercise.
- Does your PSC take a financial risk?
One key feature distinguishing a business providing services from an employee is that a business takes on some financial risk. For example a requirement that mistakes be rectified at your cost and on your own time, rather than during billable hours. Other ways of demonstrating financial risk are that you invest in equipment (computers etc.) without a guarantee that the company will have work to cover the cost, and that you have to invoice your client to get paid, running the risk that you may not get paid on time, or at all.
- Are you expected to use your own resources (belonging to the PSC) rather than those supplied by the client?
This is another of those differences between employees and companies providing services, and again an analogy with a non-contracting company illuminates the reasoning. If you hire a plumbing firm you expect the plumber to arrive with tools. If he came to your house empty-handed and expected you to provide his equipment you would wonder what sort of company you were hiring. Your equipment and stationary should be supplied by your employer, which is your own PSC, not the client.
- Are you distinct from employees of the client?
It is important not to become what IR35 tribunals have described as “part and parcel” of the client’s organisation, if this happens HMRC will try to argue that you are indistinguishable from an employee and so should be treated as such. So far as you are able, try to avoid appearing on the client’s organisational charts, using the client’s email domain, or taking on duties typically filled by employees, such as first aider or fire warden. It is even wise to consider not using staff facilities, such as employee gyms or cafeterias, since after all you are not an employee.
- Do you always work on the client’s premises?
This is one factor that will depend on the type of work you do. Clearly if you work on a physical system, whether that is a server, an oil rig or an aircraft, you will need to be in the same place as that system. At other times security or confidentiality requirements may require you to be on site in order, for example, to access sensitive data. Always working on the client’s site, however, can give the impression that you are the same as an employee. In particular avoid being assigned a desk, but if possible arrange to work remotely when your work does not require you to be on site. If you cannot avoid working on site this does not immediately put you inside IR35, but you will need to pay close attention to your other working conditions and contract terms.
- Does anyone at (or on behalf of) the client direct how you go about completing your work, beyond specifying the necessary outcomes?
The issue of “supervision, direction and control” has been a thorny one for most of the life of IR35 with some people suggesting that if you take any instructions from the client then you are a disguised employee. This is not the case, a more nuanced view is taken by the courts. Again a non-contracting example is useful; when hiring a decorator to paint your house you tell him what colours you want and when you want the work finished by. You do not tell them what brushes to use or otherwise how to do the job.
So some level of control and supervision is inevitable, the question is one of degree. As a contractor your client should tell you the tasks they want you to complete and the deadline. They may expect progress reports regularly, even daily, and you will of course need to co-ordinate with other aspects of your project, but there should be very little direct oversight by the client and they should not specify the process by which you work.
It is a sensible idea to have a Confirmation of Arrangements – a document signed by you and the client outlining the nature of the arrangements and the control structure, and more specifically what elements are not present.
- What level of mutuality of obligation (MOO) is there?
Mutuality of obligation is an arrangement whereby each party is obliged to do something. As HMRC’s own Employment Status Manual observes there is necessarily some level of MOO for a contract to exist: you agree to do work and the client agrees to pay you for it. That however should be the total extent of MOO for a contract role, only employment contracts would go further. If there is an obligation on the client to provide you with work, or on you to accept any given task (especially outside of your contracted project), this would indicate that your position is more like that of an employee