IR35: Being 'in business on your own account'
Article kindly provided by SJD Accountancy.
Having conducted literally hundreds of IR35 reviews, and submitted dozens of contracts to the Revenue for approval it has become apparent that the most effective way to avoid IR35 is not by contract manipulation or convoluted avoidance schemes, but simply by restructuring your business.
Time and again we have submitted contracts which in themselves would fail IR35, but because of the way the business operates they have been given a pass by the Revenue.
The whole secret to beating IR35 is to demonstrate that you are "in business on your own account". This idea was first mentioned in the case of Market Investigations v Minister of Social Security and is also known as the economic reality test. It is the one test that the individual has control over without the need for any reliance on either the agent or end user.
If you action the simple steps listed below, you should greatly increase your chances of passing IR35, regardless of your contract terms.
Advertising your skills is critical. It does not have to be very expensive, and very often will produce additional income for you. Rather than simply advertising your CV think about what skills you have that other businesses or individuals may find useful such as web site design, troubleshooting, software development, internet consultancy, project management etc.
Think carefully about where to advertise. Yellow pages is a simple and fairly inexpensive place to start, but you could research trade magazines, relevant web sites and local newspapers. It all depends on what your marketplace is. Whilst free advertising is possible the Revenue are unlikely to consider it a factor if you do not actually spend anything on advertising.
An offshoot of effective advertising is that you will gain other clients which is another very strong pointer toward being in business on your own account, even if the amounts generated from this additional work are relatively small. Other income streams also lessen your reliance on contract work.
Office and equipment
A designated home office is important, preferably a room set aside with desk, chair, PC, printer, ISDN/ADSL lines, filing cabinet etc. Make sure that the telephone lines are in your Company, not your own name. A rule of thumb amount that the Revenue use for determining whether equipment purchased is a relevant factor in IR35 status is £5000 and over. So if you have more than £5000 worth of desks, chairs, software, PC's printers etc the Revenue accept this as a pointer toward being outside IR35. You should list down all of the costs associated with your office and if need be invest in more furniture, fixtures or equipment to take you over the £5000.
Spend some time developing your own web site and getting registered with the major search engines. Not only could this bring in some business, but again shows the Revenue that you have put some thought into your business and how you might attract additional clients.
Have your own letterheads, invoices and business cards printed. Not only does this look more professional but again demonstrates that you are serious about your business.
Where possible keep your skills up to date or learn new skills. These could be not only in your own field but in other areas such as marketing, management and so on. From an IR35 point of view you should keep a record of what you have actually done, how much you have spent, and how long you have spent. This is good business practice and yet another demonstration to the Revenue that you are in business on your own account.
Make sure you are registered for VAT and obtain professional indemnity, employers and public liability insurances.
If you implement these points on an ongoing basis you should have a much greater chance of passing IR35 regardless of your contract. This doesn't mean you shouldn't push as hard as possible for an IR35 "friendly" contract as this will make things even easier when submitting a case to the Revenue.