IR35 this IR35 that - so just so I'm clear what is IR35? (Feature)

[UKFF Mod]

I've seen sooooo many IR35 articles over the last 10 years. From IR35 rules to IR35 contracts, from IR35 calculators to IR35 umbrellas - the list goes on.

More...

If you have any comments to make about this article feel free to start the debate below!

[The SMG]

Crikey, the author was on fire with that post. Another beauty from The SMG - who is this kid?

[Malvolio]

Shame he's wrong on several counts, isn't it...

1. Make sure the services contract between you and the client contains all the necessary pointers towards self employment.

Doesn't help if the actual engagement is on the grounds of a contract of service or if you are under the Control of your client. Increasingly cases are being argued on the real situation, not the contractual one. You have to behave like a business. And to be really pedantic, I'm not self-employed, I run a business.

2. Sign an IR35 confirmation letter with your client stating (again for the record) exactly what the terms are and how you will perform your agreed activities.

Unnecessary if the contract and schedules are properly and accurately written. One of the elements of retaining Control is that you are able to decide how and when the services are to be performed. Many clients will not sign such letters since they compromise the contract, and such letters will have little legal standing in court. So they are strictly nice-to-have to ensure both sides know the rules, but they are not a defence.


3. If you truly are self employed and can carry out an assignment in the manner described in your contract, do exactly that and pay close attention not to deviate away from the T&Cs.

This is true, but seems a bit redundant. If you're not going to honour your contract, why sign it?

4. Take out IR35 insurance or become a member of the PCG (I'm not endorsing them of course, but they can very much look after you if the sh1t hits the fan. See Arctic Systems).

Well agreed, but Arctic wasn't about IR35; PCG is a lot wider than just an IR35 defence mechanism. Also worth noting most of the knowledge and case law for IR35 evolved from PCG's own efforts.

The real defence is to fullly understand Direction and Control and Mutuality (Substitution is nice but has been weakened by later judgements, unless of course you do actually substitute someone) and apply them properly.

And as I keep saying, using an Umbrella is not an IR35 defence; apart from anything else you end up paying more. Paying tax because you fear the consequences of defending your position is patently stupid. Far better to be prepared to fight. Only 0.4% of IR35 challenges have been won by HMRC, which must tell you something...

[The SMG]

Originally Posted by Malvolio

Shame he's wrong on several counts, isn't it...

1. Make sure the services contract between you and the client contains all the necessary pointers towards self employment.

Doesn't help if the actual engagement is on the grounds of a contract of service or if you are under the Control of your client. Increasingly cases are being argued on the real situation, not the contractual one. You have to behave like a business. And to be really pedantic, I'm not self-employed, I run a business.

2. Sign an IR35 confirmation letter with your client stating (again for the record) exactly what the terms are and how you will perform your agreed activities.

Unnecessary if the contract and schedules are properly and accurately written. One of the elements of retaining Control is that you are able to decide how and when the services are to be performed. Many clients will not sign such letters since they compromise the contract, and such letters will have little legal standing in court. So they are strictly nice-to-have to ensure both sides know the rules, but they are not a defence.


3. If you truly are self employed and can carry out an assignment in the manner described in your contract, do exactly that and pay close attention not to deviate away from the T&Cs.

This is true, but seems a bit redundant. If you're not going to honour your contract, why sign it?

4. Take out IR35 insurance or become a member of the PCG (I'm not endorsing them of course, but they can very much look after you if the sh1t hits the fan. See Arctic Systems).

Well agreed, but Arctic wasn't about IR35; PCG is a lot wider than just an IR35 defence mechanism. Also worth noting most of the knowledge and case law for IR35 evolved from PCG's own efforts.

The real defence is to fullly understand Direction and Control and Mutuality (Substitution is nice but has been weakened by later judgements, unless of course you do actually substitute someone) and apply them properly.

And as I keep saying, using an Umbrella is not an IR35 defence; apart from anything else you end up paying more. Paying tax because you fear the consequences of defending your position is patently stupid. Far better to be prepared to fight. Only 0.4% of IR35 challenges have been won by HMRC, which must tell you something...

Come on Malvolio, you really did enjoy the article didn't you? I know full well that Arctic was nothing to do with IR35, but it's probably the best know PCG vs HMRC 'win' and was a good reference for the 'sh1t hitting fan' scenario.

Other than that, i'm not "wrong" on any of the four points - ALL are relevant and can be used as a holistic defence against IR35. It's belt and braces, nothing more and BTW I guarantee that HMRC have collected tax on more than 0.4% of IR35 challenges. The 0.4% represents the headline figures and gives no indication of pre-tribunal settlements...

G

[Malvolio]

Originally Posted by The SMG

Come on Malvolio, you really did enjoy the article didn't you? I know full well that Arctic was nothing to do with IR35, but it's probably the best know PCG vs HMRC 'win' and was a good reference for the 'sh1t hitting fan' scenario.

Other than that, i'm not "wrong" on any of the four points - ALL are relevant and can be used as a holistic defence against IR35. It's belt and braces, nothing more and BTW I guarantee that HMRC have collected tax on more than 0.4% of IR35 challenges. The 0.4% represents the headline figures and gives no indication of pre-tribunal settlements...

G

If you're giving advice. give accurate advice. Most of that was peripheral good practice, the real defence is (a) no D&C, (b) no MOO and (c) professional representation for when Hector tries it on.

As regards lots of people paying up because of the fear of IR35 - why are they doing so? It's around £500m a year unnecessary and unjustified taxation; just how stupid is that?

Paying IR35 or the equivalent taxes is purely a voluntary decision and one many of us choose not to make. That decision is justified by the pathetic win ratio, and if you look at the known 6 losses, the earliest four were almost certainly winnable had they had proper representation, Dragonfly was serously atypical and the sixth was so dodgy a judgement it's been sent back for retrial from scratch on appeal).

The more people realise that, the more pointless IR35 becomes.

[PhilAtBFCA]

Thanks for this article.

I think different writers will always have different ways of looking at the same subject but I think it would help to try and be clear about what IR35 is and the article says:-

"In essence, IR35 simply says that if a self employed contractor provides services to a client but acts and is controlled in pretty much exactly the same way as the client's direct employees"

With respect to the writer this is not actuallly 100% accurate. especially as we are trying to define IR35 in essence.

To illustrate why I would suggest that it would be possible for a contractor to be outside IR35 if they were totally controlled by the engager, but did not have to perform the work themselves.

This unfortunately means that your definition is not accurate.

I really would stick to David Smiths approach on IR35 of which my interpretation is the following:-

IR35 is legislation which looks at the notional contract between an engager and the person engaged ( thereby seeing through the parties in between ) and looks to see if there is an employment relationship between the two. If there is an employment relationship then the IR35 deemed payment applies, if there is not an employment relationship it doesnt.

Then I would stick to David Smith's approach on the definition of an employment relationship which is based on the Ready Mixed Concrete case in the 60's.

Basically it says that for employment to exist the relationship between the parties must show ALL the "irreducible minimum of three" charateristics:-

1. Personal Service
2. Control
3. Mutuality Of Obligation

Being outside of IR35 is about proving that there is an employment relationship NOT about proving self employment, there is a difference.

Having one of the three factors above missing means that there will be no employment relationship, and no IR35.

I agree entirely with the writer that once you have decided which is your IR35 defence ( and yes belt and braces would suggest more than one of the factors missing would be good !) then evidience gathering is best done whilst you are on the contract.

In practice, getting your client to sign a letter has proved difficult for many people, but you can write a letter with your practical understanding of the relationship in regard to the three factors above and send it to the client and I would also do the same to the staffing company, if they dont refute it you have something.

You may think that is a waste of time, but you never know, if the HMRC uses evidence from a client 3 years later in a statement that was written 2 years after the contract ended and you have some evidience that contradicts that which is dated when the contract was in force- which is more valuable ? the courts will decide but bear in mind common sense.

Another point maybe to think about , is that when gathering evidence its not always about what a court would think.

Evidence is also about putting HMRC off if they want to have a go at your status, on the basis that they have enough problems trying to prove against your assertion that you are not employed if you have the evidence ( and its real !), they may well just move onto an unprepared contractor, an easier target so to speak.

Recent PCG & Accountax wins show this to be true, even after 5 years.

I am 100% firmly with the writer on another point:-

"So if you are a disguised employee, take it on the chin, do the right thing and operate the deemed employment payment on your salary"

To me this is all about knowing what IR35 is about and making a decision, and that is up to the contractor to do, with the help of advisers if they want to.

Being outside IR35 has gone through manys tages over the past 10 years, and currently there seems tobe a new stage developing where agencies and clients are increasingly concerned about Inside IR35 contractors claiming employment rights, the first few cases have materialised. This means that they are sitting up and starting to listen about what an outside IR35 engagement really is about. So I would suggest that contractors would be well positioned to use this by educating themselves about how to be a true outside Ir35 contractor and applying all that they know in practical terms.


I hope that is of assistance. Please keep up the good work with your informative articles, the more eductation the better I believe !

Phil

[CliveP]

First class post Phil, thanks....

Clive

[Vaseline]

Originally Posted by PhilAtBFCA

To illustrate why I would suggest that it would be possible for a contractor to be outside IR35 if they were totally controlled by the engager, but did not have to perform the work themselves.

Basically it says that for employment to exist the relationship between the parties must show ALL the "irreducible minimum of three" charateristics:-

1. Personal Service
2. Control
3. Mutuality Of Obligation

Phil

This is a really helpful post Phil. I had to read it twice to make sure it sank in. I'm still however not entirely convinced by your first point. So, just so i'm 100% clear on this, you're saying that I could be completely under the control of my client (2. Control) and they're also obligated (3. Mutuality Of Obligation) to provide work for me, and I am obliged to accept that work BUT just because I am able to provide a substitute worker (1. Personal Service) I will not fall foul of IR35?

It would be great to clarify this point....

Thanks again
V

[Malvolio]

Originally Posted by Vaseline

This is a really helpful post Phil. I had to read it twice to make sure it sank in. I'm still however not entirely convinced by your first point. So, just so i'm 100% clear on this, you're saying that I could be completely under the control of my client (2. Control) and they're also obligated (3. Mutuality Of Obligation) to provide work for me, and I am obliged to accept that work BUT just because I am able to provide a substitute worker (1. Personal Service) I will not fall foul of IR35?

It would be great to clarify this point....

Thanks again
V

In theory, yes. In practice, no. Every case is different and there are no golden bullets. The judge is quite capable of disregarding inconvenient details such as a contractual RoS if he feels the overal picture is one of employment. That 's basically what happened with Dragonfly.

[CrazyMoose]

jeeezzz, did someone just say "Smoke & Mirrors"?