Contractors' Questions: Are payment and working reality IR35's Catch 22?

Contractor’s Question: The new contract my limited company has won has passed an IR35 review, but how do I truly know the assignment won’t be caught by the rule given that the actual working practices are yet to commence?

Also, if a working practices review I plan to have in the second month finds the contract to be inside IR35, isn’t it the case that I should have been paying PAYE for those months? I can't know whether to apply PAYE until the practices review is complete, and I can't do that until I've worked on the contract for a few months! Is this a 'Catch 22' of IR35?

Expert’s Answer: An IR35 review that only looks at the contract is worthless, as you seem to suggest. A good IR35 reviewer will always seek from you the information you already hold. This concerns you and your business e.g. how long you have been trading, if you have an office, business insurances and what it is you do. It could be that your line of work could automatically put you inside IR35. It should also be clear whether or not you have worked for the client before, in what capacity and for how long.  If you have been at the same client/end-user before, but as an employee, you will immediately be in the ‘high risk’ bracket of IR35 applying.

A further ‘high risk’ bracket would be if the end-client falls within the public sector, but the reviewer would ideally be able to explain the risks you face and recommend actions you can take to mitigate those risks.

You should also have (even at this early stage) quite a lot of information about the working practices e.g. a spec setting out the detail of what you are going to do; when and where you will do it. You may have been interviewed and gathered more details of the work. All these things would be captured by the reviewer, ideally prior to you signing the contract. It is therefore usually possible to form an IR35 opinion at this stage and to negotiate changes to the contract to put you into a much stronger position. It is also possible to sort the contract out and then wait for a couple of weeks to ensure that the reality is as expected.

As to your payment queries, being inside IR35 does not mean that you have to operate PAYE and NIC each month. Calculations are made at the end of the year. This means that you can take money from your company while budgeting to allow for potential shortfalls at the end of the year. Your accountant will be able to advise you of the optimum levels of salary, whatever your IR35 position.

To summarise my answer to your two-fold question; you do not need to wait for a few months to establish your IR35 position and you can pay yourself as soon as you wish.

The expert was Kate Cottrell, co-founder of IR35 status advisory Bauer & Cottrell.

Wednesday 6th July 2016