Contractor's guide to working outside IR35
Readily accessible evidence has long been the key to quickly closing down an investigation by HMRC into your IR35 status, writes Helen Christopher, operations manager at contractor accountancy specialists Orange Genie.
This guide examines some simple ways you can protect yourself and prove you are working outside of IR35.
Let’s start by remembering who is making the IR35 decision. In the case of your public sector contract, it will be the public sector body, but your recruitment agency may also have some influence and involvement.
Educate your client/agency
If your end-client or agency has little or no experience of IR35, or they are taking risk-adverse blanket ‘inside’ decisions, we strongly recommend that you put them in touch with an expert status adviser. Remember, ‘reasonable care’ must be applied when forming an opinion and an external expert can assist in developing robust processes to minimise the end-client’s risk when taking the IR35 decision.
Currently, HMRC is encouraging public sector bodies to apply the Employment Status Service (ESS), also known as the IR35 digital tool, to assist in the decision-making process. This tool presents both an opportunity and a threat. HMRC have said they will stand by the outcome of the tool assuming accurate data is supplied, so if an ‘outside’ decision is made the report will be worth its weight in gold. But the tool is based on HMRC’s view of the legislation and it does not align with years of case law.
If you are a public sector contractor, we strongly recommend that you make sure your end-client or agency knows that they are not legally bound to use this tool; that it can give inaccurate results and that there is other evidence that can be gathered to support an ‘outside IR35’ decision.
Strong outside or weak inside?
You may or may not decide to use HMRC’s ESS tool to assess your own status. If you are doubtful of the fairness of HMRC’s tool, there are other online IR35 tools that can be used to provide an indication of how likely you are to be inside or outside IR35.
These tools can act as good filters. If your result is a strong fail (i.e. definitively caught by IR35, so ‘inside’), it is probably time to accept the inside IR35 status and focus on maximising your take-home pay the best way you can. Conversely, a strong ‘outside’ result indicates you can continue through your PSC, but make sure you have physical evidence to support your answers.
If your status indicator tool or the ESS assessment results in a borderline pass or an “unable to confirm” result, then you should probably consider an independent IR35 review.
This review will look at the terms of your written contract and your working practices. It can provide a thorough objective evaluation of your actual situation, as the reviewer can talk to individuals as witnesses to establish the true facts of your relationship with your end-client. An employment status indicator tool, from HMRC or another party, is unable to do this.
Another benefit of a full review is that your reviewing expert can identify areas of the contract that need to be amended in order for it to reflect the working practices and keep you outside of IR35. So your end-client / agency may be prepared to rely on this expert independent review when making their decision.
Contractors, remember -- the written terms of your engagement are one of two key factors in determining your IR35 status. The other is your working practices. But first, we will look at what you can do to ensure both practices and paperwork support an ‘outside IR35’ decision.
- Tendering for a contract is a good indicator of being in business on your own account. Offer a free hour’s consultancy on a speculative basis to further demonstrate this. Keep records of the time you spend tendering for contracts or providing free advice. Build up evidence of presentations, letters and emails as well as dates of meetings with potential clients. Confirmation of both won and lost tenders will be useful, as it demonstrates financial risk and reward.
- Assuming you are successful in your tender make sure your contract is a contract for services. It should clearly state what your company has been engaged to do (ideally something that a regular employee does not do), and should not be a ‘business as usual’ role. Specific project-based assignments enable you to quote fixed fees and are better indicators of being ‘outside IR35’ than ongoing rolling contracts.
- Your contract should be consistent with what actually happens in practice. If your contract states you are not subject to the direct Control of the client but in fact you are, then the contract will be overridden by the working practices.
- Ideally your contract should estimate the contract term i.e. “approximately 6 months.” Ahead of the end of the six months you should terminate early, perhaps with a week to go. This type of behaviour is not possible in employment and is a good indicator of being an independent contractor.
- If you accept additional work or an extension to the contract, make sure the extra work is documented and explicitly stated in a new contract; don’t casually fall into becoming an employee.
And if you were asked to undertake additional work outside of the contract but you refused, email your client explaining why you have refused and state that the task is outside of your agreed terms. Retain the email as strong evidence that you are not controlled by your client and that there is no Mutuality Of Obligation (MOO) between you.
- Make sure your contract contains a Substitution clause. You should have the right to send in a suitably qualified alternative to yourself should you be unable to attend for any reason. It is common for substitution never to have occurred but you can still maintain evidence to support this right.
Retain evidence of any other contractor that you are working alongside, undertaking a similar role who has substituted. Create and maintain a list of other contractors who could act as a substitute and exchange emails with them to evidence their willingness and agreement to the commitment.
- Make sure your contract contains explicit payment terms and if your end-client does not meet these terms, send and retain written communication chasing any late payments. This provides evidence of ‘financial risk’ and your relationship with the end-client. If you are charging VAT, make sure your contract states this.
Contractors, you can do much more to shore up your outside IR35 position when it comes to working practices, such as by organising your workload in certain ways; using confirmation of arrangements and collecting badges of business. All of these weapons at your disposal to combat IR35 will be explored in Part Two (published on ContractorUK here).