I have been approached by a new client to help with his Ltd comp bookkeeping.
His background is IT, but since forming his Ltd company a couple of years ago, he specialises in providing Project Management to mainly large financial institutions.
My concern is that I think he may fall into the IR35 category, but he disagrees. He is on his own, and from what I can see, all his contracts have been in the region of between 3 and 9 months, normally doing a 37-40 hour week for that company, on a specific project, then moving onto another company, and another project. He does have a guy who he sometimes sub-contracts work to, but on the whole, he does pretty much 100% of the work required in the contract. He insists that he ran through this with his accountant at the beginning, and because he is being taken on for a specific project with an end date, (all be it often extended) then he is not 'employed'. He never seems to get any benefits from the companies that take him on. (IE no sick pay / paid leave / pension etc)
I think he feels I am kicking up over nothing, and I don't really want to lose him before I even start, as his accounts will be a doddle to prepare. But if he is at risk with IR35, I think I should flag it up. I have tried reading through the HMRC site for guidance, but the more I read, the more confusing it becomes! If anyone has knowledge of IR35, then I'd appreciate their opinion on this scenario.
There seems to be a lot of accountants out there who believe in IR35 proof contracts but have a sad awakening in the cold light of day.
There are also quite a few accountants who read about IR35 when first implemented and still think that what they are seeing now is the same beast.
It isnt. IR35 has evolved over the years with the earlier versions looking at the company as a whole to the newer versions looking at companies on a contract by contract basis so it is now possible for a single business to be both caught by IR35 for some work and non IR35 for other work.
The case that you state above is cut and dried. Its caught by IR35.
Short term employee's have no right to sick pay, holidays or pensions with a company but they are still employee's rather than self employed so that test taken alone is of no consideration in determining whether someone is caught by IR35.
There are a lot of factors to be taken into account but generally very, very few cases get past the IR35 tests.
One of the pivotal tests is the right to substitution.
Some agents build it into contracts automatically but its often a case of substance over form in that a business hires a person and even though they may have the right to substitute the client would be unwilling to accept a substitute as they contracted the individual not someone else in that individuals stead.
Lawyers have made fortunes out of debating that one in court.
After saying that IR35 has evolved, one of the best guides as to what denotes employment status is still one of the original documents. Have a glance at some of the bits and bobs in here (see attachment) bearing in mind that there have been 14 years of shoring up the holes in IR35 (time that could have been far better spent abolishing it!).
Note that the file will have todays date as I just changed it from RTF to DOCX format but its actually a 1999 document.
But basically, you are right Liz and the previous accountant if only using the arguments that they did was not (but bear in mind that the legislation has evolved so even taking other evidence into account means that if they were correct when they gave the advice does not mean that the advice is still valid now).
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
IR35 is a confusing piece of legislation as it is based on opinions and interpretations of years of historic case law. The actual legislation has remained largely the same since it was brought it but the importants of different tests have changed with each important case.
I disagree with Shamus that your client is caught by IR35 according to what you have said as nothing you have mentioned about your client rings any alarm bells. There are, however, a lot more factors as Shamus as said that need to be considered before you can assume being inside or outside IR35 and your client needs to review their situation with each contract. A contractor can go inside or outside IR35 even during the same contract if their working practices change.
The best thing to tell your client is to seek professional help. They need to consider their written contract and their real working practices (the day to day working relationship with their end client). We have a variety of free resources on our website that may help. If your client was investigated by HMRC, they would expect proof of why they consider themselves outside of IR35, so just saying "because I do a specific project with an end date" just won't cut it.
At the end of the day, you can't force them to take the relevant precautions. Perhaps get it recorded that you have tried to steer them in the right direction though. I have attached a guide; 'IR35 in a nutshell' that might help you but if you have any questions, feel free to contact me.
interesting that the case seems cut and dried IR35 to me but quite the opposit to yourself.
It may be that (probably like yourself) I know hundreds of people in the same situation as the Liz's client (not exagerating there. Unfortunately though much as I'm working on it I don't represent all of them but I also work within that environment) so I am reading what they have not told Liz about the reality of their contract rather than actually reading it and looking at the specific facts of the case which of course would need to be done to make a proper informed decision.
A lot of people attempt to traverse IR35 based on contracts that would not stand up to scrutiny. The most common issue being the line slipped in about the right to substitution.
The reality though is that industry hires individuals for their knowledge and skill so the right to substitute is basically non existant (even in the odd case where management agree to substituting someone for a couple of days to do a bit of filing to make it look as though the right exists).
I notice that my line about substance over form in relation to substitution is echoed in spirit within your booklet.
I think that quite a few contractors confuse their contracts being IR35 proof with HMRC not having got around to them yet.
Similar story with umbrella companies. You might have noticed a large number of those disappearing from the landscape as HMRC identifies them as collections of individuals rather than a business in itself.
I do not hide the fact that I personally fundamentally disagree with the whole premise of IR35 but to keep clients safe unless they are a genuine case that IR35 should not apply then one needs to consider the clients attitude to risk before advising them to take too much notice of the contracts out there that seem to have more holes in than a colandar.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
It is interesting but I guess that's the result of an unclear legislation! Cheers HMRC!
Yes I agree about contracts not lining up to scrutiny. Far too often contractors assume their contract to be compliant but in reality, it's not worth the paper it is written on. Which is why the working practices are far more important and should be reviewed regularly if they change.
Right of substitution is very difficult as it is considered the most important test yet it is the least likely scenario for a contractor to use! Typical! Obviously the best defence is to show that they have actually used a substitute but let's face it, most never need to and most contractors are solitary by nature so may not know anyone else with the relevant skills/experience to do the work. In this scenario, it's always a good idea to get the end client on board and ensure they understand the rights existence so if HMRC did contact them, they would respond appropriately. After all, it should not be forced out of a hypothetical scenario. A confirmation of arrangements form is always good to get signed by the end client as well (if they are willing to do so) in order to obtain written proof of the reality of the contract.
Definitely agree to contractors assuming they are outside just because HMRC havn't got around to them! I think they often forget that HMRC can enquire into anyone's accounts. HMRC love their tactics to trip you up in an enquiry too, pushing for employment terms. There is an interesting (although looong) case study on Contractor Weekly's website called the IR35 Chronicles I believe which goes through an entire enquiry and displays all their tactics.
As long as they pay the right taxes accordingly, IR35 isn't a problem but they definitely need to assess their situation in more depth.
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Qdos Contractor: IR35 specialists & contractor insurance broker. Services for accountants/agencies available
Thank you Shaun and Gemma for your replies.
It really is a can of worms isn't it?! I will inform the client of my concerns, and make sure he talks again with his accountant / gets some professional advice on all this IR35 stuff.
Gemma - I will keep your details if that's ok. I have a particular interest in this, as my other half is in IT/ Projects and has been thinking of moving to contract work for a while now. Its my horror stories of IR35 that's putting him off I think!!
