Contractors' Questions: Do many short contracts preclude me from IR35?

Contractor's Question: I realise that a taxpayer can be caught by IR35 even if their contract's duration is only a single day. But surely my four separate three-month
stints within the last year are much less likely to attract the Revenue's attention than the work history of my contractor colleague, who's spent a few years supplying the same client company? To scrutinise my employment status, HM Revenue & Customs would have to invest resources in investigating five separate contracts. So is it therefore likely that HMRC would not examine me under IR35 but would instead choose my colleague, who I know who has been with the same client for at least the last two years?

Expert's Answer: The real issue you are up against is the point at which HMRC can identify the number of contracts you have. HMRC will have your tax returns and accounts, but these documents do not identify the source of the income so it is only when they actually open an enquiry or review and ask you to provide details of your contracts that they will know you have had four in one year.

I would suggest that although HMRC has the power to investigate each contract, they are likely to concentrate on one first, perhaps a poorly drafted one or one
they have experience of. They then may or may not look at others. In short, having four different contracts in a year does not mean you will not attract HMRC's initial attention.

However, more positively, you could find any investigation wrapped up very quickly. This is likely to be for the reasons of cost effectiveness and, more importantly, from an IR35 perspective, the existence of multiple clients supports 'being in business of your account' and shows a lack of integration into the end user's organisation; also known as 'disguised employment.'

The key here is that, assuming you are declaring an outside IR35 position, you should make sure that all your contracts accurately reflect your working practices, which will help to limit the extent of any investigation.

The expert was Kate Cottrell, former Inspector of Taxes for the Inland Revenue, and managing director of IR35 advisors Bauer & Cottrell.

Wednesday 14th Jul 2010
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