Top Five IR35 Hotspots
Top Five IR35 Hotspots
IR35 is well into its teenage years – reaching its 17th birthday this April, and being a parent of two teenagers I was struck by some of the parallels I can draw between the two!
Stubborn – despite many rumours of its demise and calls for it to be scrapped, IR35 is still around
Complicated – with the many amendments and interpretations which have gathered over time IR35 is still one of the most difficult and misunderstood areas of tax to get your head around
Growing – the influence of IR35 is starting to spread whether that be to Public Sector contracts, the restrictions on travel and subsistence expenses or auto-enrolment implications its scope is starting to expand
Love of information technology! – mention IR35 to anyone, and the typical example is that of an IT contractor!
With this in mind, there is a greater need for businesses to be aware of some of the fundamental areas of IR35 which may or may not apply to them or any contractors they work with. In order to help, I’ve highlighted the Top 5 IR35 hot spots to be aware of:
Hotspot 1 – Agency Legislation
HMRC provides some clear guidance as to when we should even start looking at IR35 as there are other similar pieces of legislation which need to be considered first. The order HMRC outline is:
- Agency (Part 2 Chapter 7 ITEPA 2003)
- Managed Service Company (MSC) – (Part 2 Chapter 9 ITEPA 2003)
- Intermediary (IR35) – (Part 2 Chapter 8 ITEPA 2003)
The full details of Agency and MSC legislation are outside the scope of this article but broadly speaking if a business supplies a worker’s personal services to another client who is directly under “supervision, direction or control” of the end client then there is a risk that either of them would apply.
When considering IR35, it is important that it is done in the right order.
Hotspot 2 – Hallmarks of a business
A well tested question when considering IR35 is “In the absence of the intermediary is the person in business in their own right?” If not then IR35 could well apply.
When answering this, typical areas which should be examined in relation to the contractor’s business are:
Business Premises – do they have their own business premises which they could operate from?
Marketing – how much marketing for additional work is done? Is there a website? Business cards?
Record keeping – what level of record keeping is kept i.e. invoices raised, expenses incurred
Insurances – do they hold relevant insurances that cover them for the business being carried out e.g. public liability, professional indemnity
Substitution – are they able to provide a substitute to undertake the engagement on their behalf.
Number of clients – how many clients do they have, although not decisive, especially for smaller businesses or those just starting out is an area for consideration.
As with IR35 in general, this isn’t a tick list exercise so there may be some areas which apply and some which don’t, it’s about taking an overall view of all the facts before coming up with a decision.
Hotspot 3 – Financial Risk
If there is any element of financial risk for the contractor, then this is a good indication of being outside IR35.
Examples of financial risk include:
Invoicing –no payment without a corresponding invoice
Holiday/Sick pay – no provision of being paid while off sick or on holiday
Efficiency savings – the opportunity to profit through their own efficiency
Cost of correction – having to bear the cost to correct their errors
Hotspot 4 – Equipment
The provision of own equipment or not is an interesting one. The provision of own equipment is a good indicator of being outside IR35. However, care needs to be taken as case law has also shown that the opposite isn’t true. i.e. if you don’t provide your own equipment, then it doesn’t automatically bring you into IR35.
Hotspot 5 – Working relationship
If the answers to the following questions indicate a high degree of supervision, direction or control of the working relationship by the end client, then the likelihood of IR35 applying is high.
What work is done? – Often covered by the term “mutuality of obligation”. Is there an obligation to keep providing work to the contractor? For example, a contractor is engaged to carry out a specific project, and for unseen reasons, it comes to a halt part way through a day. Is the end client “obligated” to find them work to fill the rest of the day?
When is the work done? – are there conditions as to when the work is done, i.e., between certain times each day, or is it left for the individual to decide when it gets done as long as the deadline is met?
Where is the work done? – is there a requirement for the work to be carried out in a certain place at a certain location or is there a choice as to where it can be done?
How is the work done? – How much guidance is needed in relation to the work which is being done. Is there an end product and how the individual gets to it is left to their own knowledge or is there a step by step more instructional basis to the relationship?
Determining IR35 status is often defined as more of an art than a science as each case needs to be considered on its own merits taking into account all factors before coming to a final conclusion. The areas outlined above are only general guidance so if you’re in any doubt then seek professional advice as getting it wrong can be costly.
Catch up soon,