Worried about IR35? You’re not alone. Ask any contractor (especially those working via limited companies) what their biggest work stress is, or what they like least about contracting, and you will invariably get the same answer – IR35. Ever since it was introduced in 2000 by HMRC, IR35 has got stricter and stricter in its pursuit of ‘disguised employees’ to the point where it is now necessary to check and double check every contract for IR35 potential and to conduct yearly IR35 tests on your contracting business to make sure you don’t get trapped. With that in mind, this article offers a brief checklist of issues to bear in mind for contractors who are concerned about their IR35 compliance:
Make Sure You Work For Multiple Clients
One of the easiest protective measures to put in place, and the most obvious, is to diversify your contracting client base. Make sure that you never spend too much time on one client (particularly if you would be working at their premises.) By moving regularly around various clients you ensure you won’t be logging in too many hours / days / weeks with one client, at one location, and giving the impression of being a ‘disguised employee.’
Make Sure You’ve Got Your Own Kit
If you want to look like your business is yours and that you’ve invested in it then it is essential to be able to show that you have spent your own money investing in your own equipment for your own business. Whatever equipment you need for your work, make sure it is your own. The moment you start letting clients buy you equipment or provide you with equipment to work a contract is the moment you open yourself up to falling within IR35.
Put Your Money Where Your Mouth Is
In other words, carry some financial risk! Invest money in your company, spend money getting your business started, and take on risk in your working life. This doesn’t mean go gambling at lunchtime with the company funds, just that you work on the basis that if you don’t deliver, or you screw up, you’re prepared to issue refunds or not get paid. If you work and are not guaranteed to be paid then that is an element of risk as you are reliant on your various clients paying you. That is risk and is a positive thing to show HMRC to stay clear of IR35.
Don’t just issue invoices based on an hourly rate for the work you are doing. You will need to track your time for your own books and those of your clients and you may even want to use timesheets. But you shouldn’t just invoice on your hourly rate. Instead you should charge on the cost of your hourly rate plus your business expenses. Any business will have operational expenses that it has to find and these should be built into your costs – billing for this ‘bench time’ is expected as it is part of the working hours you spend on your business, but which can’t be specifically attributed to one client. In order to cover all of your bench time costs it is absolutely necessary to retain a bit of profit from each job towards non-billable hours. And doing so will show HMRC that you are running a business, not just being employed by a client.
Keep Perfect Records
Data retention is your best friend in the battle against IR35. The more information and data you have available showing both your revenue from different clients and your operating expenses (with as much detail as possible) the better case you will be able to build that you are not a disguised employee, rather that you are a business entity.
Register for VAT
Though this is only compulsory for those contractors who earn more than £83,000, any contractor who starts to get near this figure or who expects to be there soon should probably register anyway. Not only will it encourage much better record taking but also it will look more professional and make you look more like an independent business.
Register With The Information Commissioners Office (ICO.)
Similarly, joining up to the ICO for data protection purposes will also look professional and independent.
Spend Money on Advertising – This one comes with dual benefits. Firstly it will get you more clients and keep your name out there. Secondly, it helps you with your IR35 issues. HMRC need proof that you aren’t just working as a disguised employee for one client. If you were not advertising, they would question how clients can find you? So retain records of all the money you spend on advertising your services (as well as the adverts themselves), and keep hold of any receipts for business networking events and meet n greets, business cards, flyers and contracting or industry memberships. Absolutely anything that shows you constantly trying to attract new clients will be useful in arguing your non-IR35 status.
Be Easily Reachable to New Clients
As with advertising, another way to draw a clear line between you and your clients is to have obvious ways of reaching and signposting your business. These should include a business address and an office space to work in and a business website with a business email address.
Learn The Mantra – Supervision, Direction and Control!
HMRC looks for any sign that you are under either the supervision, direction or control of a client. If so, you will be within IR35. There are a number of things you can do to avoid this, and it is worth incorporating them into your thinking when signing new contracts.
Make sure you have a substitution clause in your contract. This provides a clear marker that your business is taking on a contract (and that someone else will fulfil the contract if you get sick) and not you as a person.
Keep IR35 In Mind At All Times
As well as the mantra of supervision, direction and control, always keep in mind how something will look if you are ever called in for an IR35 investigation. Getting your mind-set right is half the battle. Firstly, as you go about your working life, make sure everything you do is as a business, not something that feels like being an employee of one client. How does something look? How could it be perceived? Keep this in mind at all times. Secondly, if the worst case does happen and you are investigated then make sure you go into the investigation
- (a) armed with proof of everything discussed above
- (b) with the mentality of a business owner who works for no one but himself!