Top ten IR35 myths debunked
IR35 might have temporarily disappeared from the headlines since the Personal Service Companies Committee unveiled its final report, but the myths around the legislation show no sign of abating, writes Clare Rickman of InTouch Accounting.
To separate fact from fiction, here are the ten most frequently cited IR35 myths -- debunked:
1. IR35 applies when I’ve been on site for 2 years
IR35 depends on how you work on a day-to-day basis, not how long you’ve been working at one place. It’s true that the longer you work somewhere the more likely you are to be deemed “part and parcel” of the firm, and HM Revenue & Customs will of course try to use that against you in a status dispute. However provided you can prove one of the main factors against employment then the time you spend on site isn’t a defining issue.
The confusion over this 2-year period most likely relates to the 24 Month Rule, but that’s an entirely different piece of legislation that simply determines the point at which you have to cease claiming for motor and travel expenses. There is no interaction between the 24-month rule and IR35.
2. I have a substitution/control clause in my contract, and my agent says the contract is 'IR35-friendly' so I must be outside IR35
Sadly this is very common, but it’s not the silver bullet that many people believe it to be. Having something written in your contract is great, but it won’t protect you in the slightest unless it’s genuine. IR35 depends on your working conditions, not the written contract.
HMRC have the power to talk to your end-client direct, and if the client doesn’t agree that you can send a substitute then any clause in the contract is pointless, plus you run the risk of the whole contract being dismissed as a sham so any genuine clauses could be dismissed too.
If you really do have the right to substitute, or full autonomy over the work you do, then get it confirmed in a separate document and keep it safe. Remember that with IR35, HMRC can go back 8 years, so they may end up talking to someone who never actually knew you or your working practices.
Be careful to ensure you give the real details to any company you buy IR35 insurance from too, as they won’t pay out if you’ve not given them the true picture. If you can, get insurance that includes a review of your working practices, not just the written terms.
3. I’m caught by IR35 so I can’t claim expenses
IR35 doesn’t change the expenses you can claim, the same rules apply as would apply to any other limited company. The deemed salary calculation only takes into account expenses that would be allowable if you were any employee though, which is perhaps where the confusion stems from.
4. I have another contract for a few days a week, so that means I’m outside of IR35
IR35 applies to each individual contract, and whilst having more than one contract can help show you are a genuine commercial business it doesn’t stop either contract falling inside IR35 if your working conditions on that contract point toward employment.
5. I have to use client equipment and work on site, I must be inside IR35
Not necessarily. There are some perfectly valid business reasons for requiring staff to work on site and with secure equipment – working for the MoD for example. Provided the rules apply to everyone, contract or permanent staff, then using client equipment is not an indicator toward IR35.
6. Not opting out of the Conduct Regulations means I’m subject to control and is therefore a bad move from an IR35 point of view
This is a favourite for some agencies, and we’ve even seen some charge an additional “admin” fee if the contractor refused to opt-out! Keep in mind that most agencies want you to opt-out of the Conduct Regulations because it means that if the client goes bust they are under no obligation to pay you. They therefore have a slightly biased viewpoint.
In our view, opting out has no strong effect either way as far as IR35 goes, so do your own research before making any decision. Bear in mind that if you’ve met the client before you sign the contract, then you’re opted-in by default anyway!
7. I have to work set hours each day so I must be inside IR35
Most clients have set working hours for many reasons, including Health & Safety and security, so it’s not necessarily an indicator that you’re subject to control and inside IR35. If you work in a bank for example, there’s no use in you working 11pm to 7am when no one else is around.
Alarm bells should ring if the wording is similar to that in an employment contract – working hours, lunch-breaks, holidays, sickness, reviews, redundancies etc – but dictating set hours a day or working hours should not cause an issue.
8. Other contractors here are outside IR35, so I am too
Be very careful before relying on other people’s status to decide your own - you have no idea if their contract is the same as yours and they will usually be barred from telling you the full details due to confidentiality agreements contained therein. They may have agreed a separate Confirmation of Arrangements letter with their client contact that they can use as proof, or there may be other agencies involved.
A court will not agree that you’re outside of IR35 based on nothing more than the fact that other contractors on site are outside IR35, and those other contractors are unlikely to spring to your defence either. Get your own contracts and working practices reviewed, get your own insurances in place, and keep your own evidence to prove your own status.
9. I don’t get holiday pay or sick pay, so I’m not an employee
While being in receipt of holiday pay and sick pay are pointers toward employment, not receiving them is conversely not definitive proof that you’re not an employee. In fact, there have been cases where a person was found to be an employee so tried to go back to claim employment rights, and lost!
10. I’m inside IR35 so I may as well go to an umbrella company
There are many reasons to go to an umbrella company – income under £30,000, a short term contract, or the ease of being paid like an employee. But being inside IR35 is not one of them. Even if you’re inside IR35, a limited company will still be more tax-efficient. As a limited company, you also benefit from Flat Rate VAT, the new Employers’ Allowance and get the kudos of running your very own business.
Despite the Intermediaries legislation being around for well over a decade, we still hear many misconceptions about it and its effect in practice. There is a lot of misinformation about IR35 online, and a lot of advice given by ‘my friend at the pub’ that isn’t always entirely technically accurate. To those contractors who are unsure about whether you are inside or outside IR35, we recommend consulting a professional who specialises in the legislation, such as an employment status firm or an accountant specialising in contractors’ tax affairs.
Editor’s Note: Further Reading –