Writing for Business Advice, Dave Chaplin, CEO and founder of ContractorCalculator, outlines some of the most hazardous IR35 risks freelancers need to be aware of to ensure they don’t become a tax-avoidance target for HMRC.
Since new public sector IR35 rules came into effect on 6 April, freelancers and contractors working in the public sector must be very careful that they are not caught by IR35 and open to a damaging tax hit.
The new legislation means that any public sector hirer has to assess your IR35 risk, and must do so by taking “reasonable care”. Some are devolving that responsibility to their agencies, and some agencies are devolving it to the contractors’ accountant, who is then asking you to assess yourself and pass the information back up the chain.
Being aware of the following ten IR35 risks will help ensure you don’t become a target for HMRC.
1. Do not allow yourself to be told how to work
If you allow your client to instruct you in detail on how to carry out your work, this implies control and is a huge threat to your IR35 status.
Your client should be agreeing project deliverables with you, and then just leaving you to get on with it.
2. Do not be named in your contract as the sole provider of a service
Being obliged to provide the services personally is one of the biggest pointers to being caught by IR35. Any engagement should be between the client or agency and your company, not you personally.
You can be named in the contract as being one of the personnel who will provide the services, but it should not state that only you can provide those services and no-one else.
3. Do not agree to work on anything that crops up
If you agree to take on work which is outside the scope of your contract, this makes you what one judge referred to as a “tail-end Charlie”, and is a strong pointer to being controlled by the client.
If your contract is role-based, and not project based, perhaps where you have a job title, then you are likely to be providing skills and then agreeing to work on whatever assignments the client gives you.
This is how employees work, not genuine contractors. Genuine contractors are project based.
Likewise, do not let your client move you around onto different projects or work areas that were not originally outlined when you agreed to work for them. You need to be providing an agreed set of skills for a specific project.
4. Do not agree to long termination notice clauses
Including a long termination clause in a contract is one of the major IR35 risks, because it can imply an obligation by the client to provide you with work, and an obligation by you to complete it – something called “mutuality of obligation” (MOO).
If the project is cancelled or finished and the client has to provide work after giving notice for, say, four weeks then this demonstrates that MOO is present which will hamper your IR35 status.
Ideally you want to have zero notice, and no obligation for work to be provided.
5. Do not specify minimum hours in your contract
Including a minimum number of hours each week is a firm indicator that mutuality of obligation is present.
Having “core hours” or a set working pattern is something that employees do. Genuine contractors do what is required and have discretion as to how they work those hours.
Rather than minimum hours, use “estimated hours per week required to deliver the services”, but do not make it a contractual obligation.
6. Do not have the hallmarks of an employee
Being named on the client’s organisation list, having an employee like badge with your name on it, or attending meetings that are about employee matters are all signs that you have become part and parcel of your client’s organisation and are therefore at risk of IR35.
It’s a secondary factor, but can swing a judgement. Be careful.
7. Do not take part in an appraisal
Accepting a performance appraisal by a client will provide HMRC with plenty of ammunition to claim IR35 should apply, as it suggests that you are not in business on your own account.
Conducting performance appraisals of your client’s personnel will also yield the same results.
8. Do not get paid for time off sick or holidays
Taking on a contract entitling you to holiday pay or sick pay is a very strong indicator that you are firmly inside IR35. Employees get these benefits. Genuine contractors don’t.
9. Do not start contracting with a former employer the day after leaving work
Going contracting for a former employer immediately after leaving your job with them is highly risky, placing you firmly on the taxman’s radar.
HMRC will assume you left your job on Friday to become a contractor on Monday only to benefit from tax savings, and not because you are a genuine contractor.
10. Do not ignore your IR35 status
If you are working in the public sector, you now have to assure all parties that you are outside IR35, because the default status is caught. If the agency does not get the assurance from the client that you are outside IR35, then by law they must deduct tax at source.
So, you absolutely cannot sit on your hands.
Getting a review is the essential first step to avoiding the IR35 risks. You can obtain a free IR35 review online.
Dave Chaplin is the founder and CEO of ContractorCalculator an online resource for contractors, freelancers and the self-employed.
Find out more about the regulatory burdens hindering the success of Britain’s freelancers
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