IR35 – build your case before HMRC gets involved

Last Updated: 13-01-2021

Reading Time: 7 minutes

Despite recent catastrophic public losses, HMRC continues to push IR35. Managed service companies, contractors working ‘outside’ IR35 and clients employing them? This is the taxman’s stance:

HMRC will investigate and challenge these arrangements through every route open to it (including litigation)

This statement signals clear intent. It also explains why so many large corporates have already scrapped their contractor policies.

IR35 Reform will stack odds in HMRC’s favour

taxation on a bullseye, denoting target
Taxation target

Now, fast-forward a few months from now to April 2020. That’s when IR35 decision-making kicks in for the private sector.

Yes, Sajid Javid has given an election promise to ‘review’ the upcoming changes. But the coalition promised the same 8 years ago and we’re still waiting.

Few contractors will have the choice about how they’re paid. Clients will decide the contract status, if it’s inside (PAYE) or outside (paid gross).

Some think that this is the end of contracting as we know it. But we shouldn’t write off the sector as dead. Far from it.

UK businesses have grown used to the flexibility contracting brings. Contractors share a joint responsibility to maintain that dynamic workforce.

Responsiveness, Responsibility and Thinking Like a Business

Clients and the service-providing contractors alike need to think on their toes.

With so many clients going carte blanch PAYE, the volume of IR35 targets will shrink. That increases the odds of HMRC calling on remaining single entity limited companies.

Contractors will need to up their game and take more responsibility. They’ll have to prove that they are a business and not a disguised employee.

Those that think like an employee will be putting a target on their backs. To prove they’re a business and stay outside, they’ll have to start thinking and acting like one.

Don’t wait for the dreaded letter before acting

When the IR35 team are onto you, you’ll get a letter from HMRC. It’s not an invitation to their Christmas Ball.

The letter’s guise is that the taxman wants to check you’re paying the right income tax and NICs. The subtext is: we’re checking to see if you’re inside IR35.

They will ask to see your accounts, contracts and expenses and benefits. It may refer to the current year, the last tax year or a period even further back. HMRC can backdate an IR35 investigation and does so regularly.

The letter then asks if you’ve “considered the possibility” that you’re working inside IR35. If you say you’re ‘outside’, you must explain how you’ve “arrived at that conclusion”.

What happens next

There’s a chance IR35 will ask for a face-to-face meeting. They will no doubt ask you if you’ve used the government’s CEST tool at that meeting. But here’s the kicker.

Many leading lights in the industry believe that the CEST tool isn’t fit for purpose. However you input your information, the tool will conclude that you’re working inside IR35.

It’s the same with a face-to-face interview. Those who know about tax protection declare that the questions there are stacked, too. No matter how you answer their questions, chances are you’ll put the IR35 noose around your own neck.

Level the playing field

If you’ve got the letter, don’t agree to a meeting until you know the agenda. There is no obligation for you to agree to a meeting at this point.

Write back to them and ask them to be more specific. Ask them what the meeting will entail and the questions you’re likely to face.

Once you have their response, you can prep yourself properly. Then, there is only one real course of action to take: seek professional help.

But you’ll help yourself no end if you don’t wait for the letter to arrive. Think like a business from the off.

Right now, if HMRC asked you to prove that you’re outside IR35, could you?

Here are several ways you can ‘evidence’ yourself as a bona fide business, starting now:

Sending In A Substitute

If you’re a limited company contractor, the contract is with your business, not you. Or should be. In the event that your contract is through an agency, the same applies. A client engages the agency, who in turn engages—and pays—your company.

Your contract should make this clear. Back it up with an agreement with a substitute willing to step in on your behalf. The contract and the agreement should both be with your limited company.

It might take some getting your head around and more work. What if the substitute is better than me and usurps my extension? How will my client perceive me if I need to send a replacement in? How will it affect my earnings?

This is where you have to start thinking B2B. Better to keep your client happy AND keep IR35 at bay than the alternative.

On that note, make sure this is a conversation you have up front. If you’re working with sensitive information, you may have to follow certain protocol.

Confirmation of Arrangements (CoA)

Okay, you say. How will the substitute know what the client expects of them? Would they risk exposing themselves to IR35 without a contract to back it up?

To answer that, ask yourself how you know that the client wants of you. IR35 evidence must be watertight, with no room for ambiguity. So a Confirmation of Agreements helps all around.

Your contract should document the work your client expects of you. Talk to your client. Explain why it’s key to have an agreement framework.

If you think about that for a minute, it makes sense. Only with the full picture can an IR35 expert accurately review your situation. If you have that extra assurance, your substitute is then confident they’ll be safe, too.

It won’t hurt to run your credentials through the CEST tool. But even if it does come out in your favour, it won’t solely influence their decision. It’s client evidence that often affects the outcome of many IR35 cases.

Obligation and Control

As a business owner, you should retain an amount of control over your own destiny. Again, a client would expect nothing less, given that yours is a B2B arrangement.

What control can you reasonably ask for, given you’ve a role to fulfil?

Can you undertake any of the defined work from a remote loaction, like home? Or Starbucks?

If so, do your hours need to align with the client’s office hours? Showing key differences to employees in the way you provide your service matters to IR35.

It similar with tasks. In your contract, you’ll have confirmed your area(s) of responsibility. Stick to them and the services you’ve agreed you’ll supply. Neither should the client expect nor you volunteer to work outside that remit.

Where Control bleeds into “MoO”, or “Mutuality of Obligation”

The only obligation you have is what’s outlined in your contract. But getting the balance and tone of ‘rejection’ right can be difficult.

So as hard as the temptation might be, resist extra tasks. Note dates you’ve refused, even if it makes you sound like a ‘jobsworth’. If there’s recourse, note that, too. Even if your client’s employees become disgruntled, distance yourself from anything fractious.

You’re not an employee with an ambiguous remit. Provide your service in the manner you’ve outlined in your contract.

Prove that you’re liable for self-supporting finances

Every business faces some element of financial risk. As a contractor, you may think proving that you’re liable is impossible. If the client suffers hardship, you may get terminated early. But there’ll be other contracts, right?

There is evidence that will prove you’re running a bona fide business.

You will have laid out—sometimes significant—costs that you may take for granted. Hardware—laptops, special gear and bespoke software—are great examples of outlay by you.

To stay competitive, you also have to keep up with your industry. Training can cost a small fortune, depending on your role. Record all the niche-specific training you’ve taken. Itemise where you’ve paid out for it from your business.

Don’t disclose training you’ve had from your client. This will plant you in the ’employee’ category, without question. As will having your own parking space and attending social events for free.

If you’re on a fixed price job rate, you have more options

You may have had cause to adapt or correct work in your own time, and for free. All the better. This is a great way to evidence your financial independence.

With fixed rate jobs, time can be your friend (as well as your enemy). Complete the task within the time frame and you can look for extra work elsewhere. Supplying more than one client is a sure-fire way to prove independence.

Plus, if you’re thinking like a business, you’ll be marketing like one. Website creation and hosting, social media promotion and business cards. These all point to you being a genuine independent business, which is what you want to prove.

Is it all worth it, given IR35 Reform?

No doubt, some contractors will see this as a lot of work for what could be little reward. And perhaps the point of the upcoming Reform.

Many private sector clients will whitewash contracting. They’ll put all such service providers on payroll without thinking twice. Some may wait until after Reform in April 2020. But others—banks in particular—have started already.

Some contractors have already unwittingly tied themselves into contracts beyond next Spring. How flexible clients are to renegotiation will depend on each client. That’s another reason to open and maintain dialogue with the hirer.

What is the point of all this work when you’re going to be PAYE anyway?

Interesting, many contractors brought this question up in one of the contractor forums. They were bemoaning the changes and claiming “the death of contracting” was nigh.

But others had a different view. Their argument was (is) that the new changes will sort the wheat from the chaff. Anyone who is a disguised employee should go PAYE and stop sullying the industry. This will leave genuine contractors to provide services B2B.

The amount of this advice you take on board will depend on your own perspective. If you’d rather not put in the work, perhaps you’re better off as an employee. HMRC will catch up with you at some point. Even if they don’t is it worth working with that constant Dementor?

For any genuine, remaining contractors, life should treat them well. Acting like a business is, perhaps, the B2B all and end all. For further help with your status, do get in touch with our contractor-specialist partners.

Author: John Yerou

John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.

Posted by John Yerou

on December 6th, 2019 16:54pm in John’s Blog.

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