Contractors' Questions: What’s my IR35 status as a limited company director?

Contractor’s Question: I am the director and sole employee of my new limited company that I use to provide services as a contractor. For employment status purposes, do I fall under the category of 'self-employed' as far as HMRC is concerned?

Expert’s Answer: If you are the sole director of your limited company your employment status, and therefore the amount of tax payable, is determined by the 'IR35' legislation which has been in force since April 2000. This applies on an engagement by engagement basis during a particular tax year.

The tests used by HM Revenue & Customs are whether your client has a right of control over how, when and where the work is done; whether you have an enforceable right to use a 'substitute' to work in your place, whether there is an obligation on the client to offer additional work and for you to accept it and finally, other factors such as the degree of risk in performing the work.

Simply submitting invoices is not enough and evidence of actual commercial risk is required such as correcting defective work for free. Above all, the contract terms must at all times precisely reflect the working practices terms. HMRC will, of course, seize upon any discrepancy. Unlike other industries, contractors in IT are at a disadvantage as they tend to provide services to one client at a time, so good evidence of exposure to financial risk is especially important.

An example to consider is the case of JLJ Services Ltd v HMRC where the contractor was caught by IR35 because the true nature of the relationship between the contractor and the client changed over time and eventually matured into 'deemed' employment. Although the contractor completed various projects in the initial three years of the series of engagements with the client, the contractor later accepted non-project based work so was caught by IR35 and faced a six-figure bill, plus his own representative's costs. The fact that the right to substitute was never used weakened the importance of this test which, as explained earlier, is one of the numerous factors that are used to determine status.

The expert was Martyn Valentine, managing director of The Law Place, an IR35 and employment status advisory.

Monday 21st September 2015