What evidence outside-IR35 contractors need to prove themselves
Given public sector engagers’ tendency to take a risk-averse approach when determining their contractors’ IR35 status, it is vital that independent workers collect ‘evidence’ to show they belong outside IR35, writes Andy Vessey, head of tax at Qdos Contractor.
Almost needless to say, this evidence-gathering process will become even more important should private sector changes to IR35 be enforced in due course.
However, when it comes to IR35, the term itself -- ‘evidence’ -- is perhaps a little misleading. It can be difficult to find something solid to present to HMRC that automatically deems a contractor outside IR35. And generally-speaking, in IR35 enquiries currently, the taxman is reluctant to accept much evidence that constitutes clear signs that a contractor belongs outside the rules.
When HMRC begins an IR35 enquiry, the opening letter offers a contractor the opportunity to explain why they consider themselves outside IR35. And it is at this point that we advise contractors to ‘throw everything they have’ at the taxman.
But even if contractors do, HMRC is highly likely to want to investigate further to generate their own ‘hypothetical’ opinion. Therefore, it is vital a contractor is able to provide an overwhelming case that demonstrates their working arrangement belongs outside IR35, and one that HMRC cannot ignore or disprove. The following is what a contractor should consider.
Utilising the right of substitution
A contractor actually exercising their right of substitution is compelling in proving that IR35 does not apply. In absence of this, having a substitute ‘ready to go’ is recommended. Evidence to demonstrate this could be a written agreement between the PSC and the substitute, having them agreed by the client in advance (for example if security clearance is required).
Demonstrating the degree of control
This could be shown by working from a location of the contractor’s choice, working outside ‘normal’ client hours, and having a clear description of the deliverables. This description should be accompanied by another document stating that any changes or extra services required by the end-user are subject to written agreement, thereby demonstrating that a contractor cannot be moved from task-to-task at the whim of the client.
Control over the method of services is also key -- a contractor shouldn’t be told or instructed on how to provide their services.
Showing Mutuality of Obligation (MOO) doesn’t exist
It is often harder to evidence a lack of MOO, but it could be managed by keeping record of any offer of work a contractor has chosen to decline, suffered from being told to ‘down tools’ and receiving no fee as a consequence, or both parties agreeing on short or immediate termination periods.
Proving financial risk
Anything that proves a contractor is exposed to a significant financial risk is useful when making a case for sitting outside IR35. This ranges from, among other things, material investment in business assets, paying for all costs of sale, meeting the costs of all training, charging a ‘fixed price’ rather than an hourly or daily rate, bad debts, and showing (where applicable) that they have corrected errors within their own time and at no cost to the end-client.
Confirmation of Arrangements (CoA)
Some say that a CoA document holds little weight in the event of an investigation, but it’s our opinion that having the agreed working practices documented in writing and agreed with the end-client can only have a positive impact on an investigation.
Therefore, evidence showing a contractor has had their contract terms reviewed by an independent specialist; that they have had their working practices reviewed, agreed and signed by the end-client, and that the contractor has completed HMRC’s CEST tool would all be useful pieces of ‘evidence’ in the event of an enquiry. That said, CEST is not reliable and HMRC will hardly ever accept all of the above at face value, and will almost always still seek to clarify this with the end-client.
Regardless, a contractor should be encouraged to enter into a dialogue with their end-client to make sure both parties have an equal understanding about the way in which the services will be provided, as enquiries often hinge on end-client evidence.
At the very least, a signed CoA document can be useful in pointing HMRC in the right direction and to the most appropriate contact within the end-client’s organisation.
There are also other forms of so-called ‘evidence’ that a contractor can retain which -- in isolation – does not deem the individual outside IR35, but can collectively prove beneficial when challenging HMRC.
- evidence the contractor has invested in and uses their own equipment,
- the ability of the contractor to provide services to other clients simultaneously,
- details showing the contractor is running a genuine business, (e.g. building their own website that is active in seeking out and generating new revenue streams),
- evidence the contractor is not treated the same as employees -- for example by paying for any end-client training/social events and non-remuneration for any ‘down time’.
Often, a contractor utilising their own equipment that is essential to the services -- or which the completion of the service rests upon -- is a strong pointer towards self-employment.
Given HMRC’s current partisan attitude when it comes to employment status, its struggle when recognising reasonable prospect of success and the likelihood that private sector IR35 changes will be enforced in time, it’s increasingly important a contractor is prepared with a range of evidence signalling that they belong outside IR35.