IR35 – Implications 2013

Introduction

IR35 is a tax legislation designed to tax ‘disguised employment’. It has as been around since 2000 with varying levels of success. With the present government on a mission to reclaim as much tax is it can, now seems a good time to clarify how a contractor can protect themselves.

Some background on the legislation can be found on the Wikipedia: IR35, the focus of this post is to explain the difference between a contractor and a normal employee and explain how the contract can protect the contractor from being ‘inside IR35’.

The tests of employment

The Contractor Calculator site provides a succinct explanation: “Contractors using a limited company to trade would be ‘disguised employees’ if they pass the tests of employment and if, were it not for their limited company intermediary, they would otherwise be employed by their client…”

  • Control: if a contractor is told by their client where, when and how to complete the tasks allocated on their contract, they have passed the control test.
  • Substitution: if a contractor cannot send a replacement, or a substitute, to complete the tasks for the client on their behalf, they have passed the substitution test.
  • Mutuality of obligation (MOO): if a contractor expects the client to give them work, and the client expects the contractor to complete it, they have passed the MOO test.

Contract

Below are my reflections on the list provided by freelanceadvisor, which I will quote liberally:

Direction and Control

Clauses relating to start and finish times and contract duration ( amongst others ) are to be avoided – the freelancer should control when and how they work, not the client.

Substitution

The substitution clause is necessary and needs to be realistic, if it can be shown that substitution has taken place “…there is little doubt that the contract is IR35 proof.“.

To enable substitution the contractor would be responsible to provide training to the individual to ensure they are capable in providing the work. There may be an ‘overlap’ and the contractor would be responsible for paying the individual who substitutes. ( The substitutee? )

Mutuality of obligation

An IR35-proof contract must state the Client has no obligation to offer you more work and you have no obligation to take it…“.

Also, there should be no clause allowing the client to veto other contracts, during or after the present contract.

Financial risks

The freelanceadvisor site suggests that if say the contractor is paid periodically rather than when a project milestone is achieved the invoice should detail work completed as well as hours or days worked.

Also, it would be normal to maintain professional indemnity insurance.

Equipment and Premises

Often there are valid reasons for contractors being required to use the client’s equipment, this shouldn’t cause an IR35 fail. “…The contract should specify where the work will be performed….

Employee Type Benefits

Simple – the contract should state the lack of these benefits!

Part and parcel

…The freelancer or contractor should distance themselves from the client’s corporate structure and only take on responsibilities not specified as part of the project when this is industry norm, such as, for example, safety responsibilities…

Intentions of the parties

…The contract should always clarify the intentions of the Contractor and client (or agency) to be one of supplier and customer and not employee and employer. The nature of the work should be described accurately….

Termination

The contract will be terminated at the end of the project or if there is a breach of contract…” I assume that if the contractor continues to work after the contract has finished and expects to be paid this evoke the ‘mutuality of obligation’ test.

Further considerations

Demonstrating that you have business assets and services will help, say a company website, previous experience of freelancing for multiple companies, have IT equipment, insurance or perhaps even a freelancers blog!

Conclusion

I believe by writing this post I’ve both gained knowledge and shared it and am now in a much better position to negotiate future contracts to avoid being vulnerable to the dangers of IR35.

Links

What is IR35?
What is a disguised employee?
How to make your contracts IR35-proof
IR35: Direction & Control
Agency Workers Regulations

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