The Top 10 Reasons for Failing IR35
IR35 is one of the most important obstacles facing contractors. Originally designed to prevent ‘disguised employment’, whereby unscrupulous highly paid workers dodged their tax responsibilities, it has become a significant headache for legitimate Contract Workers And Other Freelancers.
If your contract falls within the auspices of IR35, you stand to lose as much as 25% of your take home pay. As such, the stakes are high. You should consider your IR35 position from the very first stages of contract negotiation. Once you have negotiated a contract, it is likely to be difficult to persuade your client to change their terms in order for it to pass IR35. The following are some of the main reasons that contracts fail IR35.
You Cannot Set Your HoursContractors, unlike employees, are entitled to work when and where they see fit. As long as you complete the work you are paid to do, you are free to decide how and where you do that work. If your client sets your hours, you will fail IR35.
Your Tasks are not Clearly DefinedContracts for services (as opposed to contracts of employment) should have a schedule of work attached, clearly setting out the work you are contracted to do. You must ensure you have this in writing, otherwise you will fail IR35.
You Are Named in the ContractYou should not be named in the contract. Instead, the contract should be between your client and your umbrella company, rather than you personally.
You Cannot Provide a SubstituteAs the contract is not between your client and you personally, you must be able to provide a substitute in the event that you cannot work. If your client does not agree to this, or if a substitution clause does not appear in your contract, you are likely to fail IR35.
Mutuality of ObligationUnder an employment contract an employer is obliged to give an employee work, and an employee is obliged to take it. This is known as mutuality of obligation. Your contract must be clearly worded so as to avoid this mutuality of obligation. After you have completed the work you are hired to do, the client does not have to give you more work and you do not have to take it. Failure to include this will lead you to fall foul of IR35.
You Cannot Work for Other ClientsIf your contract prohibits you from working for other clients, you are likely to be treated as an employee for tax purposes. Ensure that exclusivity clauses are not contained in your contract.
You Take Employee BenefitsYou must not take advantage of any employee benefits if you wish to fall outside IR35. This includes incidental items like subsidised food.
You Use Other Company FacilitiesFinally, many contractors fall foul of IR35 because, for example, they volunteer as a fire warden at their client’s company. In order to be safe you should never perform any other task or action that might cast you as a disguised employee.
You should remember that HM Revenue & Customs can backdate tax liabilities if you are found to be inside IR35. As such, it is vitally important that you avoid these common pitfalls from the outset.