How to ensure your contracting business is ir35 proof

Understanding IR35 and its Impact on Contracting Businesses

In the UK, IR35 legislation is designed to combat tax avoidance by identifying individuals who are providing services through an intermediary, such as a personal service company (PSC), but who would otherwise be considered employees if the intermediary did not exist. If your contracting business falls within the scope of IR35, you could face significant tax liabilities, including higher National Insurance contributions (NICs) and income tax.

To ensure your contracting business is IR35-proof, it’s crucial to understand the rules and take proactive steps to demonstrate that your working practices align with genuine self-employment. This article explores key strategies that can help you protect your business from the risks associated with IR35.

1. Evaluate Your Working Practices

The first step in ensuring your contracting business is IR35-compliant is to assess your current working arrangements. HMRC will examine several factors to determine whether you are operating as a legitimate contractor or as a disguised employee. These factors include:

• Control: How much control does your client have over how, when, and where you work? If your client dictates your hours, location, or how you perform tasks, it may indicate an employment relationship.

• Substitution: Can you send a substitute to perform the work on your behalf? A genuine contractor should have the right to provide a substitute if they are unable to complete the work themselves.

• Mutuality of Obligation: Is there an ongoing obligation for the client to provide work, and for you to accept it? A contractor should not be expected to accept every task the client offers, and the client should not be obliged to continuously provide work.

Carefully review these factors to ensure that your working practices reflect the independence of a contractor rather than an employee.

2. Create a Clear and Robust Contract

One of the most effective ways to protect your contracting business from IR35 is to have a well-drafted contract that clearly outlines the terms of your engagement. However, it’s important to remember that the contract alone is not enough—your working practices must also reflect the terms of the contract.

Key elements to include in your contract are:

• Right of Substitution: Ensure your contract includes a clause that allows you to send a substitute to complete the work, and make sure this right is genuine in practice.

• Control Clauses: The contract should emphasise that you have control over how the work is completed, with minimal supervision or direction from the client.

• Project-Based Work: Rather than an open-ended arrangement, the contract should specify that you are engaged for a particular project or task, with clear deliverables and an end date.

Make sure your contract reflects the reality of your working relationship, as HMRC will look beyond the contract and assess the actual day-to-day operations of the engagement.

3. Ensure Consistency Between Contracts and Working Practices

Having a compliant contract is a good start, but it is equally important to ensure that your working practices align with what is stated in the contract. If HMRC investigates your business, they will look at how you actually operate, not just what’s written on paper.

For example, if your contract includes a substitution clause, make sure that your client is aware of this right and would be willing to accept a substitute if necessary. Similarly, if your contract states that you control how the work is done, avoid falling into a routine where the client dictates your daily tasks or working hours.

Consistency between your contract and working practices is critical in defending your status as a contractor and avoiding falling within IR35.

4. Use the CEST Tool Cautiously

HMRC’s Check Employment Status for Tax (CEST) tool is available to help contractors and clients determine whether an engagement falls inside or outside IR35. However, the CEST tool has been criticised for being overly simplistic and not considering all the nuances of contractor-client relationships.

While it can be useful as a starting point, relying solely on the CEST tool may not provide a complete picture of your IR35 status. It’s advisable to seek professional advice from an IR35 expert or tax advisor who can provide a more thorough assessment of your situation.

5. Seek Professional Advice

Given the complexities of IR35, it’s wise to seek guidance from professionals who specialise in IR35 compliance. An accountant or tax advisor with experience in IR35 legislation can help you assess your current arrangements and provide tailored advice on how to structure your contracts and working practices to minimise the risk of being caught by IR35.

In addition, if you are unsure about the status of a particular contract, consider obtaining an independent IR35 review. A professional review can provide peace of mind and help you demonstrate to HMRC that you have taken reasonable steps to ensure compliance.

6. Stay Informed About Changes to IR35 Legislation

IR35 legislation has evolved over time, with significant changes affecting both the private and public sectors. In 2017, the rules for public sector contractors were reformed, shifting the responsibility for determining IR35 status to the end client. In April 2021, similar reforms were introduced for medium and large private sector businesses.

It’s essential to stay informed about any future changes to IR35 legislation and how they may impact your business. By keeping up to date with the latest developments, you can ensure that your contracting business remains compliant and IR35-proof.

Conclusion

Ensuring that your contracting business is IR35-proof requires a proactive approach. By carefully reviewing your working practices, drafting robust contracts, ensuring consistency between your contracts and actual operations, and seeking professional advice, you can significantly reduce the risk of falling within the scope of IR35.

While IR35 can be a complex and challenging piece of legislation, taking the right steps now can help you protect your business from unexpected tax liabilities and allow you to continue operating as a genuine contractor. Stay informed, stay compliant, and ensure your business is prepared for any scrutiny from HMRC.