IR35 explained and why you should worry.
We like to bang on about how to avoid IR35 – simply because it is so easy to unintentionally be at risk from it. The penalties are huge, but you can keep things IR35-proof simply by understanding it more. Most contractors make the mistake of thinking that their contract is outside IR35 so they must be. Unfortunately that is not the case and it is the circumstances not the contract that determines IR35. Here are some of the common rules that the powers at be look for to determine IR35 status.
Substitution – One of the ways many contractors get caught inside IR35 key factors is the substitute clause, if for whatever reason, you cannot fulfil the work yourself. This is one of the main differences between being an employee and being a contractor. You must list on your contract who you can provide in your absence.
Management and Command – This means anything in your contract that could be interpreted as the client having control over you. Features include working hours, specific working days, specified break times – this would suggest the client has authority over your working habit and could put you within IR35.
Mutuality of Obligation (aka MOO) – MOO is a classic sign of employee-status. This means that the employee is obliged to do whatever work the employer hands them (within reason of course!).
The employer can dictate that the employee is bound exclusively to that company, provide the amount of working hours expected and location of work – as long as the employer continues to provide that work.
This is, of course, not the case when it comes to being a contractor. The contractor has the power to state to the client what will happen and when, the client doesn’t have to hand the contractor more work, just as the contractor shouldn’t expect to receive on-going work outside the confines of the agreement.
Contracts should be scoured for anything resembling MOO before agreed upon to keep IR35-proof.
Employee Rights – Contractors do not benefit from sick pay, pensions, holiday pay, maternity pay or any other rights that an employee can be entitled to. A contract should refuse any offer of these from the client.
Financial risks – A contract safe from IR35 should not have promises from the client of regular, ongoing work. The contract should state when the contractor will invoice and what the terms on the invoice will be. It should also state that if errors made by the contractor should occur, that they will be rectified in unpaid time.
Intention and Status – Any part of the contract that could indicate that the status of the contractor and client is more employee and employer must be rectified immediately.
Work tools and office space – In general, the contractor will be working away from the client’s office using his or her own equipment. Sometimes, a situation means that the contractor has to work at the client’s office using the client’s software and equipment. This shouldn’t normally risk IR35, and generally should be avoided, but it is important to state that this might happen and for what reason.
Proof of a Contractor’s Business – The key part of staying outside of IR35 is to be able to show that you are working from home (or your own office), you are sending out invoices, you have other clients, you use an accountant to help you with your taxes, you purchase your own equipment – you do as much as you can to build and maintain your own business.
Our limited and umbrella company payroll strategies are completely free from IR35 meaning you never have to worry about an investigation down the track. We take care of this side of things, making sure you are outside IR35, which allows you to look after the most important things – doing the job well and making money!
If you do need more information on how we do this, call the team on 0207 526 4708.