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IR35: Top 5 Misconceptions

As we all know, IR35 can be hideously vague and bewildering at the best of times. The internet provides a wealth of scaremongering and sometimes inaccurate information on the subject, so it’s no wonder many contractors end up being confused.

In this article we seek to debunk the most common IR35-related misconceptions that crop up in the contractor community.

I have worked at the same client for over two years, so I must be caught by IR35.

This one pops up surprisingly frequently, probably because it is confused with the 24 month rule which relates to claiming travelling expenses to and from a workplace (but has nothing to do with IR35).

ir35 guide

In the Revenue’s eyes, the longer you have been at one place, the more likely you are to be part and parcel of the client’s organisation, but there are no set time limits. If you continue to work in a compliant manner with good working practices, you can effectively work for the same client indefinitely without your status being affected.

The one other thing to bear in mind is that HMRC may well focus on the contract that will provide the highest yield to them and a very long engagement is likely to fit this bill. Therefore the potential liability if you were caught could end up being quite high.

So it’s probably preferable to have shorter contracts at different places, but it certainly shouldn’t stop you from staying put if the contract works for both parties. It simply shows good business acumen!

I had my contract reviewed and it failed, so I’m definitely inside IR35.

This is a bit of a tricky one. Having a good contract is obviously important. In the event of an IR35 enquiry it is HMRC’s first port of call, and they are likely to focus on any negative wording.

Having said that, if (and only if) your working practices are compliant and your end client confirms this, it could override any written agreement. The sad fact is that many agencies peddle out the same rubbish contracts, regardless of how the individual contractor actually works.

If you do have a poor contract that can’t be changed, it is highly advisable that you look to put a confirmation of working arrangements in place directly with your end client. This is a short document that sets out what the true working arrangements are and will trump your dodgy contract.

I don’t know of any potential replacements for me, so my right of substitution is not genuine.

This is actually one that the Revenue themselves bring up in enquiries. However, the issue of substitution is all hypothetical. If you were not able to provide the services yourself and, hypothetically, you had a like-for-like replacement lined up, would you be able to send them in your place?

Many contractors (and end clients) initially baulk at the thought of any Tom, Dick or Harry doing the work in their place, but it really isn’t that extreme. The replacement wouldn’t need to be an employee either; providing you were responsible for paying them they could be another limited company contractor. You could theoretically source them through an agency or other network of similar contractors.

My contract states the hours that I have to work – this means I’m controlled by the client.

You have to be a little careful here. Clearly it’s not going to be good if your contract states you must work ‘8.30am to 5.00pm with 1 hour lunch break’, which is something you’d see in an employment agreement. However, the rate of payment for many contracts is based on a professional working day. So, if your contract sets out what that is, it isn’t necessarily a problem.

If you do conform to your client’s working hours and HMRC query this, a good counter argument is that you need access to their systems so it makes business sense to work on the same basis as they do.

I’m defined as a manager on my project, so this means I’m integrated into the client’s staff

There’s a big difference between a project manager and a line manager. If you are simply leading a project and ‘project managing’ internal and external resources, that should be fine from an IR35 perspective. Plenty of contractors are project managers.

However, you need to avoid having any kind of internal management responsibility. If you start getting involved in appraisals, disciplinary etc., this will become a problem from an IR35 perspective.

Please add your comments below if you have any other possible misconceptions or myths you’d like us to address.

 

By Seb Maley

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15 thoughts on “IR35: Top 5 Misconceptions”

  1. David Seagrove

    I note your last item and in particular the final sentence. Unfortunately in organisations where there mixes of contractors and employees, particularly where contractors are in the minority and are undertaking senior roles (eg Project or Programme manager roles), there is an expectation that borders on an obligation to provide appraisals of staff who have worked on your project as part of their feedback. I would argue that this can still be undertaken without jeopardising an IR35 status (omnibus paribus) as the feedback is in the context of the contracted role and nothing else.

  2. Seb Maley

    Yes, I’m sure that would be ok and clearly everything would be looked at in the context of the overall project. If the ‘appraisals’ relate solely to the project you are working on it would undoubtedly be an easy point to argue.

    It’s when you’re covering things like the individual’s progression within the company, salary rises etc., that you start to walk on questionable ground.

  3. Nic Vine

    This article is a very helpful summary reminder. One other potential popular misconception is “I work for different clients within the space of two years, so IR35 does not apply”, and I wonder if you’d care to give this one the same analysis?

  4. Seb Maley

    Yes, that’s a fairly common one too Nic.

    The fact is that it doesn’t matter how many clients you work for within any time period: you would be investigated on a contract-by-contract basis. Theoretically you could have a different contract every week and they could still be caught by IR35!

    Going a step further, you could conceivably be working on two contracts at the same time and it wouldn’t automatically mean they were outside IR35 (although running concurrent contracts clearly indicates you are a ‘genuine’ business).

  5. Monty

    Hi, I am working through a limited company. I am the Director & the only employee of my limited company. My agency says, the contract is made for you to work but not any individual from your limited company. This is true because the end client has interviewed me to assess my skill sets to work on it’s projects and hence client also don’t agree for any replacement. With this background, the agency is not agreeing to put any replacement clause. How to defend this with HMRC?

  6. Steven

    Discussions surrounding IR35 can now be found on our forum. Please visit http://www.contractorweekly.com/forum/ to be part of the discussion.

  7. James

    Is there any difference in IR35 liability if the contractor is a ‘sole trader’ rather than operating from a limited company?

    My vague understanding is that it is the company (so, in this instance, the Ltd Company using the services of the sole trader) that is liable? That may be completely incorrect, though.

  8. Seb Maley

    IR35 deals with limited companies and partnerships (as they are the ‘intermediary’), but tax/employment status is still an issue for sole traders.

    However, if you are operating as a sole trader, the potential liability would rest with the end client rather than your company.

  9. James

    [quote name=”Seb Maley”]IR35 deals with limited companies and partnerships (as they are the ‘intermediary’), but tax/employment status is still an issue for sole traders.

    However, if you are operating as a sole trader, the potential liability would rest with the end client rather than your company.[/quote]

    So, to confirm (I find these matters incredibly complicated. I hope I’m not the only one!)… Should an investigation take place in a scenario where a Limited Company (for example, a website) is using the services of a sole trader (providing development services for aforementioned website) the Ltd would be liable in the eyes of HMRC?

    What sanctions could be brought against the sole trader in such a situation?

  10. Seb Maley

    Yes, in your example the limited company (i.e. end user) would be liable for the under/unpaid tax and NI. It is the end user’s responsibility to decide the status of sole traders, so there wouldn’t be any sanctions on the sole trader himself.

    Indeed, if he was found to be ’employed’ by HMRC, he could potentially go down the route of claiming backdated holiday pay etc. from the end user via an employment tribunal. But that’s where it gets really messy!

    It is complicated and you’re definitely not the only one.

  11. Jane

    What a complete load of rubbish this all is. If I trade with one organisation I cannot be held responsible for what they do. Likewise they should have no input on what tax I pay – it is simply none of their business, it’s mine.
    We should realise that it is the intent of this Government, blue or red, to ship all IT operations overseas, and remove our right to earn a living.
    As for harassment from them I work on the principle that if they do try and ruin my life then I will fight it every inch of the way, and I am not going to pay someone else to do my fighting for me.
    All the other discussions are waffle. It is clear that any logical reasoning ceased a long time ago. There is nothing reasonable about IR35, there never has been and there never will be.
    So there is little point in discussing it.

  12. Jhem Murray

    This is exactly the type of counter logical moronic bullsht I have come to expect from the English government..morons..they fail at everything they do

  13. Brian

    What about the situation where you’re a programmer working on a maintenance contract? There’s a team of permies, plus you, all working on whatever bugs and small enhancements come up in the live system. You don’t get told how to do the job, just what the problem is, and then left to work out a fix. Someone else reviews that it does the job, and that’s it.

  14. Jane

    At the end of this day this whole subject is now a load of rubbish. HMRC make up rules that they totally ignore anyway. It’s become so passé to be no longer relevant or for that matter logical. So do not try to apply logic or for that matter devise any sensible guidelines.

  15. Chris

    Get another contractor to stand in for you for a day or two and you for them, invoicing each other for the days or hours covered.. They don’t have to have necessarily been in to your office if you work remotely anyway. then I think you have covered your self pretty well on this point.

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