Contractors working on projects inside IR35 are taxed significantly higher than those operating outside the rules. What’s more, they don’t receive employment rights in return for paying similar taxes to an employee. It’s one of the main reasons why independent professionals prefer to take on work that isn’t caught by IR35.
After changes to IR35 were introduced in 2017, public sector companies have since been in charge of deciding if a contractor belongs inside or outside the rules. From April 2021, this will also be the case in the private sector, much to contractors’ dismay.
Many independent professionals fear they will be wrongly placed inside IR35 by clients that lack experience when administering the rules. Therefore, it’s become increasingly important that contractors are confident in their IR35 status.
If you know exactly where you stand, then you will be in a better position to contribute to an IR35 decision or, if necessary, challenge and overturn an inaccurate one. If you’re incorrectly placed inside IR35, it’s important you work this out quickly to make sure you aren’t paying too much tax.
But given that IR35 is a confusing tax with many grey areas, how can you be sure of your status? And more importantly, what can you do to build a strong case to show your client or recruitment agency that your contract belongs outside the rules?
To help safeguard your IR35 status, we’ve pulled together six straightforward steps that you can take:
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Confirm your working arrangement
A Confirmation of Arrangements (CoA) is a letter or document that details the specific reasons a contract sits outside IR35. It’s signed by the end-client and is seen as one of the best ways to shut down an HMRC enquiry because it should show an accurate reflection of your actual working practices.
The document can highlight why you do not fall under the control of your client, that Mutuality of Obligation (MoO) doesn’t exist and that you have the right to provide a Substitute. Anything else that points towards you being self-employed is also worth including; from demonstrating a financial risk to having more than one client.
It can be difficult to obtain a CoA from your client, because before long in the private sector, it will be the engager (either a client or a recruitment agency) that carries the liability for incorrect IR35 decisions, as in the public sector. However, it’s considered important in the event of an investigation because it shows all parties are in agreement of status and that reasonable care has been taken to administer the rules.
Become an expert on IR35
We know that IR35 can be difficult to understand, which is why we have a whole host of IR35-related resources for you below:
Have your contract reviewed
A second opinion matters. Contractors are advised to have their contract professionally reviewed by an independent expert, who can offer unbiased advice.
With IR35 reform in the private sector approaching, contract reviews are becoming increasingly important. You can use it to support any argument for belonging outside the rules and present it to a client should you hope to overturn an incorrect IR35 decision you think they might have made.
Discover more about the IR35 contract review service which we offer at SJD Accountancy.
Provide a Substitute
Being able to provide a substitute is a strong indicator towards a contract sitting outside IR35. However, to strengthen your case that you provide a contract for services as a self-employed worker, it helps to make sure you have a capable substitute ready to go and everything agreed in writing, with the client and the individual.
Ensure MoO isn’t present
Contractors working outside IR35 need to be able to prove Mutuality of Obligation (MoO) doesn’t exist. In a nutshell, MoO is the obligation an employer has to offer work and pay, along with the obligation that an employee has to accept it.
Demonstrating that MoO isn’t present can be tricky, but ways to show its absence from the working relationship include; turning down work that falls outside your contract, only carrying out extra work for additional payment and agreeing to a shorter termination period.
Again, keep a record of anything that indicates MoO is absent. It could play a telling role when setting or challenging your IR35 status.
Control is one of the key factors to consider when setting IR35 status. First and foremost, for a contract to sit outside IR35, individuals must provide their services in a manner that isn’t dictated by the client. You need to have autonomy over your work and deliver what is agreed in your contract without working under direct supervision.
This can also be shown by working remotely, outside the client’s office hours and making sure you behave like and are treated as a self-employed worker, not an employee.
As with anything related to IR35, it’s important that your contract makes all of this clear.
Think about collecting together any other evidence that shows you are genuinely self-employed. Should you need to convince your client or HMRC that you belong outside IR35, keeping records of things that demonstrate you are a legitimate business owner and not an employee could be key.
From business insurance documents and receipts proving you take on financial risk, to having an office address and your own company website and stationery, try and gather anything that builds a powerful argument for being self-employed.
Before long, contractors will not have the luxury of administering their own IR35 status, irrespective of whether they work in the public or the private sectors. Therefore, the need to be confident in your status and to be able to show your engager and HMRC that you belong outside IR35 is becoming more important by the day.
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