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Does IR35 apply?

Deciding if IR35 applies to a particular engagement is probably the most important decision your clients have to make. It not only affects current income calculations but to get the decision wrong can prove extremely costly. Also from April 2016 no relief is available for travel and subsistence for those inside IR35.

A comprehensive IR35 contract review covers the following:

  • The business features of the contractor.
  • The reality of the working practices.
  • The written contract.

The working practices trump the written contract. HMRC will always interview the end client irrespective of the contents of the written contract especially in agency situations. Make sure you have the complete contract, including schedules and appendices. Ask lots of questions about the work and the end client’s organisation and how the contractor sits within it. If there is a job spec ask for it. Establish if this is project work or is the contractor simply filling a role? Find out exactly what your client is going to do. Make sure you have correctly identified the end client.

Beware of special cases (see HMRC’s website) where IR35 can automatically apply. Watch out for office holder roles and check this is not a public sector case.

The status issues:

When reviewing a contract you must consider:

  • substitution and personal service;
  • mutuality of obligation;
  • control (what, where, when and how);
  • defective work or services;
  • hiring helpers;
  • being in business on your own account;
  • financial risk;
  • intention to have an independent relationship;
  • provision of equipment;
  • any employee type benefits and
  • part and parcel or integration into the client’s organisation.

This list is not exhaustive and there may be other issues that are significant to a particular case.

If the working practices support an outside IR35 position you are looking for positive clauses within the contract to reflect the working practices.

  • IR35 is decided on a contract by contract basis so all contracts should be reviewed.
  • There is no such thing as an ‘IR35 friendly’ contract.
  • Failing to properly consider IR35 means HMRC will charge penalties.
  • The working practices are key and looking at the contract without considering the working practices is dangerous.
  • Seek help as soon as possible on receipt of an HMRC enquiry into IR35.

Further help

TAXguide 10/18 – IR35 contract reviews – a comprehensive and practical guide on IR35 contract reviews which is available for Tax Faculty members.

HMRC’s new check employment status tool to help you decide whether IR35 applies, see www.gov.uk/guidance/check-employment-status-for-tax.