IR35 Myths – Fact or Fiction?
If there are three words that are set to put a contractor accountant on edge, they are “My friend said……” With alarming regularity, contractors are quick to accept the comments of their colleagues; after all they must be right, they’ve been contracting or freelancing for years?
To separate fact from fiction, below are the top ten most client cited myths about IR35:-
- 1. “My agent has assured me that I am outside IR35 because I have a substitution clause in my contract and it is written to be ‘IR35 Friendly’”
Sadly, this is a misconception! No matter how well written a contract may be, it will not protect the contractor unless it is genuine and their working practices reflect the terms of the contract.
HMRC have the power to talk to end clients and if they discover that, in practice, the right to send in a substitute does not exist, there is a risk that HMRC will dismiss the whole contract as a sham.
Many contractors and freelancers fall into the trap of believing that because they have not exercised their right to send a substitute, they must be inside IR35.This is not necessarily the case. The important point is that a substitute can be sent, whether or not they actually are.
- 2. “I have been at my current end client and site for two years, I am now inside IR35”
Two years spent at one site in itself has no bearing on IR35 status, although HMRC may seek to prove a contactor or freelancer has become “part and parcel” of an organisation. As long as the contractor or freelancer can prove one of the main factors indicating an outside IR35 status, such as lack of control or direction, the length of time spent at one site is not a defining issue.
- 3. “I have more than one contract so I’m not caught by IR35”
IR35 has to be applied on a contract by contract basis. Whilst having more than one contact may indicate that you are a genuine commercial business, it will not stop individual contracts falling to be inside IR35. The actual working relationship and arrangements for each contract is what will be key to the IR35 status.
- 4. “I have to use client equipment and work at their site, I must be inside IR35”
Not necessarily. Consider the oil and gas contractor or freelancer working offshore; it is impractical for them to work anywhere other than on site or with the end clients’ equipment. There are many commercial and security reasons why an end client may insist on the use of their equipment and as long as the same restrictions apply to employees, contractors and freelancers, then this should not be an indicator towards IR35.
- 5. “I have to work set hours everyday so I must be inside IR35”
For similar reasoning to that in point four, clients often have set hours for many reasons, including health and safety and security. This on its own is not indicative of control and being inside IR35. Contractors and freelancers should be more concerned if contract terms refer working hours, lunch-breaks, holidays, sickness, reviews and redundancies.
- 6. “Other contractors here are outside IR35, so I must be too”
Every situation is unique. Contractors and freelancers should not determine their own status based on that of another’s – they are likely to have a different backgrounds and histories, they may have a different contract, a different confirmation of arrangements and importantly, no court will determine your IR35 status based on that of another.
- 7. “My contract refers to a line manager, I am inside IR35”
If the named manager exerts control and direction over the contractor or freelancer, they have a right to be concerned. It is commercially acceptable to expect an end client to appoint a project co-ordinator or contract liaison officer to ensure work is progressing as agreed, however, they should not direct how the independent contractor or freelancer carries out that work. At no time should the contractor or freelancer be subject to an internal appraisal system.
- 8. “My contract says my end client does not intend me to be an employee”
Most contracts include a “statement of intent” that confirms that the parties do not consider it to be a contract of employment. It is wrong to assume that the presence of the clause automatically means that they are outside IR35. In any status, reviewing the intention of the parties will need to be considered alongside the contract terms and working practices.
- 9. “I’m caught by IR35 so I cannot claim expenses”
IR35 status does not alter the expenses that can be claimed – these will be the same as for any other Limited company and they will attract Corporation tax relief. When determining take home pay through a deemed salary calculation, if inside IR35, only expenses that would be allowable as an employee can be taken into account.
- 10. “I’m inside IR35 so it is not worth opening a Limited company”
Being inside IR35 does not mean that it is not tax efficient to use a Limited company. A limited company contractor can benefit from the flat rate VAT scheme, the Employers Allowance for NIC and from the advantages and flexibility of being their own boss.
IR35 is a well documented area but not all information is accurate and correct. Contractors need to be aware of the potential cost of getting their status wrong and our advice is not to rely on the advice of a friend in the pub, but to contact an expert in the field, such as Genie Accountancy who are specialist accountants. They are able to provide bespoke, honest and accurate advice based on individual situations.
Please direct press queries to Jade Cayton at Dakota Digital. Email firstname.lastname@example.org or Tel: 01623 428996 opt 3.