10 Reasons Your Contract May Fail the IR35 Test

2. Are you a contractor, or representative of a personal service company trying to keep your contracts outside IR35 and pass the tough IR35 test? If so, this blog post is for you. If, as an entity we just described, you sign a contract that falls under IR35 accountant, you could end up paying a significant amount of extra tax and National Insurance Contributions, either during the contract or later if HMRC investigates you. Nearly all IR35 issues that could mean your contract is caught could be resolved before they become a problem if you get your contract reviewed for IR35 before signing it and in good time to allow negotiation with the agent or client. Here are ten things that contractors should look for in their contracts to see if they are IR35 compliant:

3. Position History Contractors should attempt to double-check whether the advertised position is for a legitimate contractor or an employee. If the contract is to cover a role that was previously filled by an employee, there’s a good chance that the contract, and the client’s expectations, will be for a worker who shares all of the characteristics of an employee, rather than a genuine contractor working outside of IR35 and on their own dime. Check the background of the contract, or it may fail the IR35 audit.

4. Past Status Rulings HMRC may have already left its imprint on the client’s business, having looked into previous contractors in specific roles and ruled that they fall under IR35. The contractors may have moved on to a new role outside of IR35, and the client may have re-advertised for a contractor, but will not want to advertise that the position is within IR35. Because this type of IR35 trap is difficult to spot, it’s critical that the contractor receives a watertight contract; otherwise, the contractor will fail IR35.

5. Control Issues The traditional tests of employment that will place a contractor inside IR35 are supervision and control. Control can be found in contracts under the headings of: The contract specifies the start and end times. The contract specifies which days the contractor should work, as well as lunch break times and duration. Specific clauses stating that the client is in charge of the contractor’s supervision and control. ● ● ● All of these clauses are common in employment contracts, but they should never appear in a contractor’s business-to-business services contract, as it will most likely fail IR35 tests.

6. Watch Out for Substitution Another common employment criterion is whether the contractor can provide a replacement. If they truly can and do so on a regular basis, the contract is almost certainly outside of IR35. However, if there is no right of substitution clause in the contract, or if the client explicitly states in correspondence, such as emails or other records, that the contractor should never consider sending in a substitute, the contract will almost certainly fail IR35.

7. Financial Risk Regular, guaranteed weekly or monthly work specified in a contract often appears to be more akin to an employee’s wage contract than professional fees paid to a contractor’s service company. To stay IR35 compliant when project milestones are met, a contractor should issue an invoice. If the client requests a weekly invoice, it should include information about the work done, as well as the hours worked and the rate. Any contract errors must be corrected by the contractor on his or her own time, as stated in the contract.

8. Too Many Organizational Ties If a contractor becomes so ingrained in a client’s organization that they appear on phone lists, organizational charts, are volunteered to be a fire marshal, or have staff reporting to them, the contract fails IR35. The contractor should maintain a professional distance from the client’s corporate structure and only take on responsibilities that are not specified as part of the project in their contract when it is industry standard, such as safety responsibilities in construction or offshore work. No matter what their contract says, a contractor can be found to be inside IR35 if they appear to be an integral part of the client’s business.

9. Implied Intentions The contract should always state the contract’s and client’s or agency’s intentions. Not stating in the contract that the client and contractor’s intentions are that of a supplier and customer, rather than employee and employer, is not an IR35 fail, but it does not help the contractor’s case when and if HMRC uses the contract to try to prove they are outside of IR35. The importance of evaluating the IR35 status of every contract before signing it is demonstrated by these common IR35 fail points. IR35 has become a highly complex area of employment and tax law after two decades of case law and legal precedents, so you should always seek expert advice. Pearl Lemon Accountants can act as those experts, ensuring that every contract you sign is compliant with IR35 regulations.