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Does ‘financial risk’ mean I belong outside IR35?

Can I argue IR35 status based on financial risk?

Q. My client recently used CEST to evaluate my IR35 status. The tool deemed my contract inside IR35. However, I intend to appeal this determination based on the fact that my company is financially liable for any mistakes made when delivering the services I provide. Is this a strong pointer towards an outside IR35 contract? If not, what else should I consider? 

A. You’re right in thinking that being financially responsible for any mistakes that you might make when providing your service is an indicator of an outside IR35 contract. In any other business to business engagement, the company that supplies its services is usually expected to spend its own time rectifying problems that have occurred due to unsatisfactory work and cover any costs that result from this.   

Having this clause clearly stated in the contract you have with your client does start to paint the picture of an outside IR35 engagement. However, it’s rare for this to be determinative of IR35 status on its own. Therefore, it could prove difficult to overturn a client’s determination based only on this aspect of your contract. 

When challenging an IR35 decision, it’s important you’re able to show compelling evidence that your contract sits outside the scope of the legislation. There are many factors to take into consideration when deciding status – the three key status tests being Mutuality of Obligation (MoO), Control and Personal Service, which is also known as Substitution. 

Given your client has used CEST to assess your IR35 status, you would be wise to ensure that your contract has a legitimate clause that allows you to provide a substitute. This is because the tool relies heavily on the right of Substitution when making up its mind. Furthermore, you should be aware that the CEST tool does not include Mutuality of Obligation (MoO).

While Substitution is important, there have been a number of recent IR35 tribunals that have been won without it being present in the contract. That said, it does factor heavily in CEST’s logic, so it’s well worth considering including the right to legitimately supply a substitute in your place should your client insist on using the tool. However, it’s vital that this is a genuine right and that you are actually able to send a substitute. 

If your contract already includes the right of Substitution and you have still been deemed inside the legislation, consider speaking to a specialist who can carry out an IR35 contract review and an assessment of your working practices. After a thorough evaluation of both, a specialist will recommend changes that you can present to your client. 

This answer was provided by IR35 specialist, Qdos Contractor.

By Contractor Doctor

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