Determining if a contract is within or outside of IR35 may sometimes be the million dollar question for a contractor. IR35 has been enforced with an idea to deter incorporation of companies with the sole intention of evading tax. A contract deemed to be within IR35, effectively means that the contractor will be considered as an employee, with National Insurance Contributions and PAYE payroll processes. This will result in higher tax exposure to contractors who offer services to clients. And this is precisely the reason why it is important for a contractor to understand if the contract is inside or outside IR35. Here is how a contractor can go about determining if the contract is within or outside of IR35, and a few steps that can help borderline cases to make suitable amendments and become compliant to keep a contract outside of IR 35.
Many indicators are used to determine if a contract is inside or outside the IR35. The most important consideration is the contract entered into between both the parties. The clauses of the contract need to be checked against the working practices of the client. If the working practices of the client and the terms of the contract appear similar, then it would be an indication that the contract is basically an attempt to evade tax, by disguising employment as a contract. To keep a contract outside of IR35 it is necessary to prove that the services offered as a contractor are entirely different and not a part and parcel of the end clients work place.
This is perhaps the standout difference between the services of an employee and that of a contractor. An employee would be called up on to perform tasks that could be varied and multi faceted. An employee can be assigned tasks as a stop gap arrangement in a domain or area of expertise that is similar or overlaps with the area of his expertise. A contractor, would typically offer specialist or specific services. The services are offered for a fee and will more or less be more like a task, where its completion would conclude the contract or part of the contract. Therefore, if you are a contractor, and if you desire to keep your contract outside of IR35 contract clauses, you need to keep your services specific.
A contractor who offers his services to a client would invariably make use of his own equipment, or make use of equipment taken on rent. An individual who relies on equipment provided by the client would give rise to the perception that the services are more as an employee than that of a contractor. While you may have actually used your equipment, it is also important that records to that effect are maintained. This will help in documenting evidence and interpreting actual IR35 meaning to prove that you have offered your services as a contractor and not as an employee.
If you have discerned certain clauses to be borderline IR35 contract clauses then it will become necessary renegotiate the terms of the contract and rework the agreement in such a manner so as to take it outside IR35. Effectively, this means that you need to work out the various offending clauses that take your service within or close to what is used as an indicator by the HMRC ESS tool to interpret IR35 meaning. While it is true that the ESS tool may not be the best or most ideal method of screening a contract, it happens to be the tool of choice of the HMRC. While the tool by itself is not legally binding on all, it helps to understand the metrics or assessment methods used in the tool. With a better understanding of the manner in which the ESS tool measures and evaluates, it is possible to keep your contracts outside of the rigid screening.
It is true that a contractor ideally offers services at his own timings and not as per the timings followed by the client. However, it is open to interpretations as recent appeals have proved. A contractor may also offer his services during a particular shift timing, while being outside the control and supervision of the client. Therefore, a contractor who needs to prove that he is outside of the IR35, should take care to ensure that if he has offered his services during the shift timings of a client, he should do so without being under the supervision or control of the client. However, it would be safe to offer services as a truly independent entity, in time slots that are at variance with the typical shift timings. This would remove suspicions and make it easier to prove that the services were indeed contractual in nature.
The effect of IR35 demands that contractors maintain proof of working with multiple clients. This has proven to be helpful in many instances where contractors have appealed against an HMRC determination of a contract to be within IR35. While, the appeal may not actually consider all the contracts, it will certainly help to press home the point that the services have been offered as a contractor. To do so, it is also necessary to maintain some kind of uniformity among the contracts entered with different clients. This will prove that the contracts are not conveniently disguised to beat tax. The clauses pertaining to use of equipment, timings, your service etc will certainly help in proving that you are in the business of offering specialised services to clients on a contract basis.
The manner in which an employee corresponds with his employer is a lot different from that of a contractor. For instance, an employee who requests for time off, would send in a formal request. And depending on the processes followed in a company, the employee would also be required to make an entry in the HR applications used in the company. However, a contractor would adopt a different approach – he would ‘intimate’ the company about his inability to work on a particular day or would intimate that he would be leaving early. And the contractor would certainly not make an entry or input into any HR applications used in the company. Here again, the effect of IR35 means that a contractor should maintain a record of all his correspondence, which will help to prove that he was not an employee.
A contractor may sometimes take part in tenders to win a contract. This should ideally be a part of the documents maintained. This will help the contractor to build a case in support of his claims that he has been offering services after participating in tenders and bidding for work. In addition to tender documents, it is also necessary that the contractor maintain records of having taken up little pilot projects to demonstrate ability. This will prove beyond doubt that the services offered are a lot different from that of an employee. An employee is interviewed and after multiple rounds of interview is inducted into an organisation. He or she is then trained and then assigned responsibilities. Whereas, a contractor may be called upon to demonstrate ability to deliver services through a pilot project without being paid for it. These records will help in proving that an element of financial risk exists in the incorporated entity.
With the right kind of professional assistance in reviewing a contract you will be able to identify many aspects that may have been overlooked. A professional review will go over every single clause of the contract in the context of the client’s working practices. With complete information on the manner in which the HMRC ESS tool is deployed for evaluation and assessment, a certified and experienced accountant would be in a better position to evaluate the contracts technically. The review will also offer inputs about changes that may be required in the contract and the actual manner in which the services are being offered. Here, it is important to understand that a contractor who has multiple contracts with many entities, needs to get each reviewed in the context of the working practices of that relevant entity. This will work as a contractor calculator and help identify clauses that may invite an adverse HMRC determination.
Also Read: IR35 contracts in Public Sector
Contractors need to be prepared for the findings of the tool developed by the HMRC – the ESI. Gov departments demand public sector entities to ensure that taxes of the right amount are being remitted. The ESI Gov tool, acronym for Employment Status Indicator, will be the tool deployed as a contractor calculator, to determine if a contract is inside or outside IR 35, though it is not binding on entities to use the tool themselves. However, it pays to be aware of the methods and filters used by the HMRC to interpret IR35 meaning.