IR35 can be confusing to get your head around at best of times, especially with a lot of contradicting information out there. To separate the fact from the fiction, we’ve debunked some of the most common myths around IR35.
Is it true that if I work for one year/two years my engagement will be caught by IR35?
There is nothing in legislation which enables IR35 to be determined on the basis of the length of an engagement. The one and two year rules seem to have sprung up because people are interpreting the employment rights which are/used to be accrued after certain periods of service, but which have nothing to do with the engagement of a contractor.
But there is a two year rule?
There is something called the 24-month rule, but this relates to a time period when a temporary workplace ceases to become temporary and for travel and subsistence purposes becomes a permanent workplace. The logic is that a contractor is being sent by his/her company to a work place which is not the company’s (often the contractor’s home address or possibly a registered office, such as the accountant’s offices).
Two important considerations: firstly, travel and subsistence (T&S) can only be claimed when an engagement falls outside of IR35; secondly, it’s when you become aware that an engagement is going to last more than two years that you cease to be able to claim your T&S expenses. For example, an engagement has an initial 6-month period; it is extended by a further 9 to 15 months; and then a further 12 months. At the point you start month 16, you know that the engagement will last 27 months – at month 16 is the point where the contractor can no longer claim T&S as a tax –free expense.
Really short engagements are never going to be inside IR35?
IR35 must be considered engagement-by-engagement and so even a short assignment could be challenged by HMRC. If HMRC start an enquiry into a particular tax year and there is a short engagement in the period under review, they will expect as much information on a short engagement as they would for any other.
A long engagement will always be outside of IR35?
As stated above, the length of engagement is not the issue. We have successfully defended a client who was engaged by an end client for almost three years. However, the nature of the engagement was such that these were individual, discrete projects over which the contractor had control. Compare this with the scenario in JLJ Services where the contractor’s engagement was deemed outside for the first period, but inside thereafter when the engagement was being renewed for 12 months at a time without any reference to deliverables.
There is no agency in the chain, so IR35 cannot apply?
The intermediary of the Intermediaries Legislation is not the agency, but the company (or partnership) through which individual is trading. IR35 requires that a hypothetical contract is created which asks: “If the individual was working directly to the end client – not through an intermediary – what would that relationship look like? One of employment or self employment?
Therefore, just because there is no agency does not mean that IR35 cannot apply.
Does having more than one client mean that I will fall outside of IR35?
As noted above, IR35 requires each engagement to be considered in isolation. Where a contractor is working 40+ hours per week with one end client and undertakes other occasional work in the evenings or at weekends, the reality is that HMRC will focus on the ‘day job’.
However, where the contractor finds themselves juggling between assignments and advising Client A that they cannot undertake work on a particular day because they are working for Client B, then the contractor is very much in control of when and where their work is undertaken the end clients are reliant on the contractor being available. This would also deny mutuality of obligations.
My end client is overseas, so IR35 won’t apply?
The client may not be UK based and so outside of HMRC’s jurisdiction, but if your PSC is a UK company, then you and your business are subject to UK tax law.
Where you would have a potential advantage in an IR35 enquiry, is that HMRC do like to get the end client’s opinion on the working practices of the engagement. HMRC cannot compel an overseas third party to provide information in the way that legislation enables HMRC to request information about a taxpayer’s interaction with a third party in the UK. Therefore, where your end client is overseas, they have to rely solely on the contractual terms and your understanding of the working practices.
What kind of contractor is most likely to suffer an IR35 enquiry?
One might be forgiven for thinking that HMRC are just focusing on the media with recent diversions into pharmaceuticals following the issue of the GSK letters. However, every contractor is potentially at risk, and plenty of freelancers have suffered an IR35 enquiry over the last 20 years. Based on our own experience, HMRC’s success rate has been extremely disappointing.
My agency/end client has told me that my contract is “IR35 friendly” – does that constitute enough in terms of due diligence?
In short: no. As a contractor, you are the taxpayer and responsible for understanding IR35 for all engagements up to and including 5 April 2020 in the private sector and continuing to do so in the next tax year where your company is engaged by a small company.
HMRC are always keen to understand taxpayer behaviour and what motivated the taxpayer to make a particular decision. For this reason, you need to understand whether your engagement is inside or outside of IR35. The best way of determining that – and demonstrating that you have undertaken due diligence – is an independent review of your contractual terms and working practices.
Article supplied by Markel