Readily accessible evidence has long been the key to quickly closing down an investigation by HMRC into your IR35 status.
Since April 2017, the same evidence is vitally important where public sector contractors find themselves the subject of an ‘inside IR35’ decision, which they disagree with.
Speedy has decided to create a guide which will examine simple ways you can protect yourself and prove that you are indeed working outside 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, it is 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, 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 two key factors in determining your IR35 status are
The written terms of your engagement
Your Working Practices
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.
Having looked at educating your client or agent, including what to do if you’ve got a strong ‘inside IR35’ or weak ‘outside IR35’ result, and at making your contract as IR35-friendly as possible, let’s now turn to cementing your working practices outside the legislation.
And for those new to contracting, by ‘legislation’ I mean either the Intermediaries legislation of 2000, or its latest incarnation in the public sector – the off-payroll rules of April 2017
Contractors are often able to vocalise why they feel they were outside IR35 during a particular placement, and they even know which person at the end-client organisation could validate their opinion. But years later, when HMRC comes to investigate you under IR35 , that person is often no longer available.
Consider preparing and agreeing a “confirmation of arrangement” or “statement of understanding” document, with your end-client and in particular your client representative, especially if a different person from the one who hired you.
These statements must set out how you intend to work and how you will be viewed and treated by the end-client while on assignment. The CoA document should provide a detailed overview of your working practices including the precise nature of the services you provide. It should also give written, explicit confirmation that you cannot be asked to do anything that is not in your contract.
Working Practices and Appearances
Arguing your IR35 status with an end-client or HMRC will require plenty of evidence on your part to support your opinion. Start to build an ‘IR35 compliance file.’ This file should support not only the IR35-friendly contract terms we have already highlighted, but also the day-to-day practices and relationship with your end-client. Think of this file as an extension of the CoA document; it is evidence from ‘on the ground’ proving that what’s in the CoA – the statements asserting your outside IR35 status — has been stuck to and carried out.
Managing your workload, tasks or project briefs
Vary your hours instead of mirroring the standard week of your client’s employees. Keep your own timesheets to evidence their times and yours.
Work from home or your own office whenever possible — evidence this with emails to confirm your plan to work from home, copies of diary notes and demonstrate your location on your timesheets. These are all useful indications of a lack of Control. Work from home or your own office whenever possible..
When taking time off, politely inform your end-client of your days away rather than request your absence. Do not use your end-client’s holiday form or HR processes, but rather keep copies of your emails informing your client. Gaps in timesheets can also evidence your absence and corroborate the fact that you did not receive holiday pay or sick pay for periods where you were not providing services.
Manage your time efficiently. Sounds obvious but in relation to IR35 it means, for example, if an IT system slippage means you cannot continue with work, retain evidence that you have left site to undertake other activities, ideally commercial. In this IT outage scenario, you did not merely remain on-site and undertake other available tasks, as an employee would have to do.
Work for more than one client. Demonstrating that you are ‘in business on your own account’ is easier if you have evidence of multiple, concurrent assignments.
Use your own equipment. Use your own computer and equipment as much as possible. Retain receipts to show that you bought the equipment for the business and try to show that it was used on a specific project e.g. emailing the end-client to say you will be using your own device due to the need for some specific software.
Organise and be responsible for your own training and development. You should be able to demonstrate your investment in your own professional development and a link to the future profitability of your business. You should not be attending end-client training sessions, paid for or not. Do not take part in your client’s appraisal process or take responsibility for any members of the end-client’s staff.
Rectify defective work at no client cost. Employees rectify work during work hours and suffer no financial consequences. As a contractor, you will need to put the work right in your own time and at your own cost. Collect evidence to show that you worked additional hours for the purposes of repair/rectifying — without charging for it. Send an email evidencing the error, the action taken and the fact that no charge has been made by your company.
Make sure you are covered by Professional Indemnity Insurance. Employees don’t need to worry about taking out insurance for poor work or advice; they are covered by their employer’s policy. As an independent contractor, you should make sure you have complete cover in your limited company’s name.
Badges of Business
It is necessary to demonstrate you are a genuine business to keep IR35 at bay. Insurance is one such ‘badge of business.’ But while your appearance of being a commercial business is very important, it must be more than surface deep — evidence is vital. It is necessary to demonstrate you are a genuine business to kept ir35 at bay. Insurance is one such ‘badge of business’
Set up, launch and maintain a website
Establish a website for your company and its services. Keep it up-to-date and publish regular blogs on topics related to your industry, services or skills. Websites should be part of your marketing machine as a contractor business, as they let you and your enterprise be found by agencies and potential clients. Using your site to monitor competitor’s websites – as contractors often like to do — is something worth keeping a record of, as is carrying out a regular online search for work, contract or tendering opportunities. Both of these are good indicators of being ‘in business on your own account’.
Defeat ‘part and parcel’ with small but significant details
When introduced to your clients’ clients, make sure you are identified as an independent contractor. You don’t want to fall into the trap of being seen as being ‘part and parcel’ of your end client’s organisation.
Similarly, you should have your own email address that includes your company name (more prominently than any mention of the client name where possible), and you should be copied-in on all emails related to your project. If your end client insists on you having an email address provided by them for the length of the contract, then ensure that you are identified in the email signature as an independent member of the project team.
For the same reasons, make sure your business cards have your company name on them and not that of your end-client. If your end-client requires you to carry one of their business cards, then it should be clear on the card that you are an independent contractor.
Also make sure that if you appear in the internal phone directory, your company should be named as well as yourself. On a related note, if required to wear an ID badge for client Health & Safety purposes, while in the office make sure that the card states your name, your company and the fact that you are a contractor.
Another tried and tested way of keeping ‘part and parcel’ at bay is ensuring you don’t benefit from any employee perks. So if you are invited to the Christmas party and want to attend, make sure you pay for your own ticket — employees won’t. If you use the staff canteen, ensure you have evidence to show you did not receive the employee discount and don’t ask for special permission to use the office gym. With all these employee-aimed perks, it’s much better for IR35 purposes that you can show you were excluded as it differentiates you from an employee.
When all else fails
Regardless of which of the IR35 status factors you’d like to nullify, whether it’s Part and Parcel, Control or another, adopting an evidence-gathering approach to reduce its applicability will mean you are prepared for the worst. If you make collecting the suggested evidence a habitual part of all of your relationships with end-clients, it will become automatic. If in the public sector, it will also mean you’re able to quickly provide reassurance to your end-client that your contract is outside IR35. You’re equally likely to banish sleepless nights if you do the suggested evidence-gathering and you’re in the private sector.
However, if despite your best efforts your public sector end-client refuses to view your contract as outside IR35, and insists that you be taxed as an employee, there are still some actions you can take.
Seek alternative options. You could look for work in the private sector, where currently you are responsible for determining your own IR35 status. A layered threat of you leaving may be enough for your public sector end-client to reconsider.
Negotiate a higher rate. If you are deemed inside IR35, you will be taking home between 20% and 30% less money if you continue to use your PSC or use a PAYE umbrella company. Letting the client know that you won’t take the contract without a rate increase may lead them to reconsider your evidence (or bump up your pay).
Highlight to your end-client that if you are effectively paying employment taxes you expect to be given additional rights — they are not likely to agree to this and may again reconsider their original stance. As some organisations have shown, end-user opinions on IR35 status are not always set in stone.