IR35, or intermediaries’ legislation is still here. And the signs are it’s not going away any time soon. To that end, you must safeguard your business against HMRC investigators, should they come calling.
Up to 60% of contractors operate in the grey zone that means a tax inspector’s investigation could go either way. They could find you operating outside IR35 (good), but equally find you operating inside IR35 (bad).
So how do you make sure that your business is outside IR35?
To show that your business is compliant, there are steps every limited company contractor is advised to take. They don’t revolve around how much tax you do or don’t pay. Yes, retention is a direct consequence of your income and how it’s accounted for. But to leave IR35 inspectors with no doubt about your compliance, you must prove that you’re a business entity:
All contractors should have their contracts reviewed by an IR35 specialist. Better still; commit your actual working practices to pen and paper, too. If the results of the review are positive, keep a record of this safe so it’s always to hand in case an IR35 enquiry manifests itself.
Also, create a document that outlines the significant reasons that show you to be a genuine contractor. The document must be crystal clear and demonstrate that you’re not a disguised employee.
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Holding business insurances shows that you’re accepting commercial risk, even as a contractor. Professional Indemnity, Public Liability, even ‘E-Risks’ cover will support your business argument.
Paying regular insurance premiums through your company distinguishes you from disguised employees. And that’s what you want HMRC to see.
Many freelancers and contractors provide an individual B2B (business to business) service. For many, the skills they offer set them apart is most likely what gave rise to them contracting in the first place. So asking them to send in a substitute is often implausible.
If you could send a substitute in your place, whether it’s for a day, a week or even longer you’d be well on the way to proving that you were a business in the eyes of the taxman.
This might seem like defeating the object of being a contractor or specialist by sending a replacement. However, once you explain that your replacement would have the same skillset as you, it becomes a less daunting proposition.
It’s often underplayed that a small thing like stationery can make a difference. But it’s the smaller details supporting the bigger ones that can make all the difference:
· Business cards
· Logo-headed letter paper
· Your company website and branded social media
· Listings/marketing as your brand to advertise your business
They’re all establishing your business entity and items like branded documents, digital or otherwise, can help prove that you’re operating outside IR35.
Any IR35 enquiry will place huge emphasis on the actual relationship with your end client. This is irrespective of whether you’re contracting via an agency or direct.
HMRC will seek to question your end client about the reality of your services. This is when your situation is most precarious. For IR35 the recommendation is to use a confirmation of working arrangements, which is a simple document that sets out the true facts of the engagement between the contractor and the client.
Providing the arrangements are compliant, it should stop HMRC taking the investigation any further.
You could find it difficult to get your client to sign an extra document. Especially when said client is uncertain of its nature and implications. You are both dealing with an official government body, after all.
You can reassure the client that the purpose of this document is to help confirm your tax position should HMRC bring it into question. In reality, it will benefit all parties by saving a hassle, time and money if you were to become the subject of an IR35 enquiry.