IR35, or intermediaries legislation to give it its proper name, is still here. And the signs are it’s not going away any time soon. To that end, you must safeguard your business against HMRC investigators, should they come calling.
Sounds simple, if you say it quick enough. But the fact is, 60% of contractors operate in the grey zone. Even worse, they don’t even know it.
What’s the grey zone? If you’re there, it means a tax inspector’s investigation could go either way. They could find you operating outside IR35 (good), but equally find you operating inside IR35 (bad).
So how do you make sure that your business is outside IR35?
To show that your business is compliant, there are five steps every limited company contractor should take. They don’t revolve around how much tax you do or don’t pay. Yes, retention is a direct consequence of your income and how it’s accounted for. But to leave IR35 inspectors with no doubt about your compliance, you must prove that you’re a business entity:
1. Provide Evidence of Business Activity
All contractors should have their contracts reviewed by an IR35 specialist. Better still, commit your actual working practices to pen and paper, too. If the results of the review are positive, keep a record of this safe so it’s always to hand in case an IR35 enquiry manifests itself.
Also, create a document that outlines the significant reasons that show you to be a genuine contractor. The document must be crystal clear and demonstrate that you’re not a disguised employee.
2. Covered from every angle
Holding business insurances shows that you’re accepting commercial risk, even as a contractor. Professional Indemnity, Public Liability, even ‘E-Risks’ cover will support your business argument.
Paying regular insurance premiums through your company distinguishes you from disguised employees. And that’s what you want the inspectorate to see.
Buying insurance hasn’t always been the greater indicator of self-employed status. But that changed when HMRC brought in the Business Entity Test.
Those of you with your finger on the pulse know that the Revenue is withdrawing BETs in April 2015. But you can still use holding insurance as evidence that you’re outside IR35 in the event of an investigation. This is for cases opened before 6th April or for three years after a recent BETs if the outcome was ‘outside’ or ‘low risk’.
As contractors, you can buy such business insurance policies for only a few pounds a month; it’s a no-brainer, if ever there was one.
3. Can you send in a substitute in your absence?
Many freelancers and contractors provide an individual B2B service. For many, that the skill they offer sets them apart is what gave rise to them contracting in the first place. So asking them to send in a substitute is often implausible.
That doesn’t stop it from being a litmus test for IR35 inspectors. HMRC will always consider substitution as a key test in determining whether you are in- or outside of IR35.
Could you send a substitute in your place, whether it’s for a day, a week or even longer? If you could, you’d be well on the way to proving that you were a business in the eyes of the taxman.
At first glance an agency or end user might baulk at the thought of you sending a replacement. But once you explain that your replacement would have the same skillset as you, it becomes a less daunting proposition. That goes for you, the agency and the client in question.
After all, you are contracting on a B2B basis. The contract is with your limited company, not you as an individual. But don’t attempt this tactic if you’re not sure that a replacement would be up to the job. If your substitute damages the relationship you’ve worked hard to build, you’ll have more than HMRC to worry about.
4. Stationery – worth the paper it’s written on
Contractors may not believe that such a small thing like stationery can make a difference. But it’s the smaller details supporting the bigger ones that can make all the difference:
- business cards;
- logo-headed letter paper;
- your company website and branded social media;
- listings/marketing as your brand to advertise your business;
- they’re all establishing your business entity.
The case of ECR Consulting v HMRC is a cracking example of how you can use company stationery as evidence:
"ECR is in business on its own account. [ECR] produced to the Tribunal copy business cards and company stationary. ECR operates from a dedicated business area at her home. It has company domain and website."
Of course, you’d have to provide more substantial evidence than your dotcom address and a jazzed up Word document. But branded documents, digital or otherwise, can help prove that you’re operating outside IR35.
5. End client confirmation of working practises
Any IR35 enquiry will place huge emphasis on the actual relationship with your end client. This is irrespective of whether you’re contracting via an agency or direct.
The taxman will deem even the best contract worthless if the client doesn’t relate its working practices. As they say, "a contract is only worth the paper it’s written on."
HMRC will seek to question your end client about the reality of your services. When they do, that’s when your situation is most precarious. Who knows what the client will say when put under pressure and faced with a gruelling list of questions?
If you speak with an IR35 specialist, they’ll always recommend you use a confirmation of working arrangements. It’s a simple document that sets out the true facts of the engagement between the contractor and the client.
Providing the arrangements are compliant, it should stop HMRC taking the investigation any further.
The downside is that some contractors can find it very difficult to get their client to sign an extra document. Especially when said client is uncertain of its nature and implications. You are both dealing with an official government body, after all.
But you can reassure them that it’s not a legally binding contract or even a legal document. Its sole purpose is to help confirm your tax position should HMRC bring it into question. In reality, it will benefit all parties by saving a hassle, time and money if you were to become the subject of an IR35 enquiry.
You can download the confirmation of working arrangements document from Qdos. But do get your completed arrangement checked by an IR35 expert before asking your end client to countersign it. You are a business, after all, and you must do everything in your power to make sure prying eyes perceive all parties concerned as such.
Author: John Yerou
John Yerou is the owner and founder of Freelancer Financials; a trading style & trade mark of the award winning Mortgage Quest Ltd. One of the most recognised names in providing mortgages for contractors and freelancers across the UK.
In 2004 John began his career in Financial Services as an independent mortgage adviser and broker. John has been instrumental in negotiating bespoke underwriting for contractors with high street lenders.
His presence in the industry as a go-to expert is growing by the day and he is regularly cited and writes in publications both locally and nationally.