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IR35 Questions & Answers
How do the off-payroll reforms affect limited company contractors?
It is still necessary for you to get legal advice on the IR35 status of an engagement in cases where:
– The client has notified you that it is within the small companies exemption – the old IR35 legislation continues to apply so you’re responsible for getting legal advice;
– You have used CEST or an online tool provided by an accountant, insurer or contractor and require a proper legal opinion from one of the UK’s most experienced IR35 lawyers;
– The contract contains an indemnity clause requiring your company to compensate the employment business and client for any tax loss so the IR35 legislation effectively applies to your engagement;
– The client has no connection with the United Kingdom, e.g., it is based in the Channel Islands, United States, etc., and does not not have an office or employees in the United Kingdom;
– The contract contains potentially onerous clauses such as unlimited liability for damages.
Are ‘Statement of Work’ solutions safe?
No, because the managed service provider offering a ‘Statement of Work’ solution is not genuinely the client for the purposes of the off-payroll legislation. If a director of a limited company contractor goes along with a status determination statement produced by a recruiter without regard to the terms of the contract and the description of the services in the contract refers to a role there is a risk of prosecution for tax fraud.
In our experience, it’s incredibly rare for a Statement of Work to refer to genuinely deliverable objectives. Nearly all refer to job titles or vague project descriptions that resemble job descriptions.
What is a “Statement of Work”?
In essence, the term “Statement of Work” has no legal meaning and its use is not encouraged. Taken at its highest, it means a description of the services to be provided by the contractor and, if competently drafted, can make a critical difference to the IR35 status of an engagement. IR35 appeals to the First-tier Tribunal (Tax) are mainly decided on the description of the services (amongst other factors).
Having reviewed many so called statements of work, it is exceptionally rare for the services to correctly define deliverable objectives in relation to a discrete project, and most tend to resemble HR style job descriptions, i.e., open invitations to HM Revenue & Customs to start an IR35 enquiry.
The hallmarks of a well-drafted statement of work:
Overview – overall aim of project, e.g., development of new air defence radar to fulfil a Ministry of Defence urgent operational requirement.
Services description – refer to deliverable objectives, not ongoing requirements. Advice may be needed to avoid the job description trap. If the client’s requirements are not readily ascertainable, then the first objective should be to define the requirements in a clear and legally enforceable manner. Applying the above example, the objectives could be to define the client’s requirements, design, testing and acceptance,
Milestones – trigger points for payment, e.g., successful completion of a phase in the project by a pre-determined date. Milestones are rarely used in practice.
Fees – whether payment is based on a fixed or hourly/daily rate. In reality, payment by the hour is preferable to demonstrating a link between work and payment. Trying to fix the price for an engagement is chasing unicorns.
Dependencies – remember, the schedule/statement of work is a contractual document. Attendance at meetings is an HR requirement which should not be a contractual obligation and may lead to disputes. Reference to vague dependencies is an elemental mistake. The contract with the client should, if the parties are competently advised, require the client to comply with the contractor’s reasonable requests for access to facilities and systems.
The Law Place’s director has negotiated amendments to countless services descriptions to accurately reflect the client’s requirements.
Does use of the CEST tool or a similar tool provided by an insurer satisfy the requirement to take reasonable care?
Absolutely not. CEST does not have regard to the terms on which the services are provided, nor can it check the accuracy of the answers provided. There is no legal basis for CEST and HM Revenue & Customs can claim penalties 0f 30% where a tax payer has acted carelessly by failing to obtain competent professional advice.
Reasonable care means the standard expected of a tax payer in the position of the tax payer in question. IR35 and off-payroll status are legal tests and it is folly to seek advice from anyone lacking relevant qualifications and experience. There are lots of snake oil sellers lacking legal qualifications who offer fancy questionnaires dressed up as “IR35 solutions”. Being conversant with IR35 is no substitute for legal training and nearly two decades’ worth of focused experience.
Often high fees are given as a reason for not seeking legal advice. The Law Place’s business model and pricing for its fees are aggressively disruptive; our director, Martyn Valentine LLB (Hons) has been providing IR35 advice since 2005 so paying more for an accountant, insurer or otherwise to provide won’t provide the assistance you need. We offer unmatched value and turnaround times.
My accountant offers IR35 contract reviews…
Remember, IR35 is fundamentally a legal question and requires specialist expertise in employment status above and beyond knowledge of accountancy. Case in point, would you ask your GP to take your teeth out? Please also see ‘Why Choose The Law Place’. Crucially, in the event of an IR35 enquiry an accountant is required by law to disclose all advice and working papers to HM Revenue & Customs. The Law Place offers a fully confidential service as it is providing you with purely legal advice.
The contract refers to a role but in reality I think my contract is outside IR35. Is this correct?
Absolutely not. If the contractual obligation is to undertake a role then IR35 will undoubtedly apply. The client will have an implied right to allocate work within the role description. The solution is a package of deliverable objectives and we can help with drafting your contracts to minimise risk.
My client requires me to provide the services for a defined number of days per week. Is this safe?
No, you will be under a degree of control as to when the services are to be provided and your ability to demonstrate that you’re in business in your own account will be drastically reduced.
Are there any circumstances where I can safely operate outside IR35?
If you operate as a genuinely self-employed consultancy and the client requires a completed project rather than a particular individual then you’re off to a good start. The key is to have your contract and working practices professionally reviewed BEFORE starting an engagement. Call Martyn Valentine 0n 07788 773871 for more details.
What if I use a substitute or sub-contractor during the course of my engagement?
This would undoubtedly help but the term in question needs to be drafted as a reasonably unfettered right. HM Revenue & Customs can and will ignore substitution clauses which are a sham – see the Dragonfly case. Recent case law has indicated that the courts are taking a harder approach to substitution. The correct legal position is that a right of substitution is a hallmark of a contract for services; if the client requires a service rather than an individual the choice of individual is immaterial. Personal service must not be the dominant feature of the contract A limited right of substitution can occur in an employment context. Recent judgments such as Basic Broadcasting Limited illustrate that substitution is not essential if the contract was entered into as part of a business. That is why it is important to avoid advisers lacking legal qualifications and legal professional indemnity insurance who place undue emphasis on substitution when in reality IR35 can be honestly managed with expert legal advice.
Is the contract between the agency and the client relevant?
The IR35 legislation requires analysis of all the circumstances of the engagement and this has been used as an excuse for HM Revenue & Customs to compare the so-called upper level contract to the contract between the contractor and the agency. However, the upper level contract does not always mirror the contract between the contractor and the agency and, crucially, the contractor is not a party to the upper level contract. Given HM Revenue & Customs’ sweeping powers to demand documents it is incorrect to assume that HM Revenue & Customs won’t request sight of the upper level contract.
In the context of the off-payroll legislation, HM Revenue & Customs can determine that a consultancy is not the genuine client, therefore, leaving the client with liability for tax, National Insurance contributions, the Apprenticeship Levy, penalties, expenses and interest.
HM Revenue & Customs has issued Notices of Determination and a huge tax bill – what can I do?
Since 2012 we have offered affordable tax representation services for limited company contractors. If we advise that there are reasonable prospects of the appeal succeeding we can act on your behalf. The costs involved will be based on an estimate based on our director’s 100% track record.
How far can HM Revenue & Customs go back during an investigation?
Once HM Revenue & Customs has started an aspect enquiry or an Employer Compliance Review they can look back at engagements in the previous 4 tax years (6 years in the case of suspected fraud) and widen the scope of the enquiry to include personal tax. If you have received notice of an Employer Compliance Review please contact us now. Since 2012 we have offered Tax Representation and maintain a 100% success rate.
The agency insists that I use an umbrella instead of contracting outside IR35.
This is false and a possibly a breach of the Conduct of Employment Agencies and Employment Businesses Regulations 2003. If a connection exists between an umbrella and a recruiter (e.g., membership of a recruiter’s preferred supplier list), then an umbrella worker can issue a claim in court for damages.
Where a recruiter requires an individual to use an umbrella a criminal offence has occurred. A charge for work-finding services is a criminal offence and occurs where a recruiter requires an individual to pay for an unwanted service. The Crown Prosecution Service may ask whether the individual could have been supplied without the use of an umbrella and the associated costs per pay slip. There is no legal requirement to use an umbrella and to claim otherwise is dishonourable. Recruiters can use payroll software to process tax and National Insurance contributions without receiving kickbacks from umbrella companies.
The Law Place can supply you free particulars of claim via our Umbrella Freeclaims service. Our aim is to stop others profiting from umbrella workers’ misfortune in being forced to work via umbrella companies.
If you suspect that an agency has received payment to be on a preferred supplier list and has insisted on the use of an umbrella involving payment for invoices, please contact the Serious Fraud Office and the Employment Agencies Standards Inspectorate.
I’m an umbrella worker and have been required to opt-out of the Conduct of Employment Agencies & Employment Businesses Regulations 2003. The client has offered a direct engagement instead of using the recruiter but the contracts with the recruiter and umbrella prevents me from working for the same client. Am I at risk?
Subject to legal advice, it is possible that if the opt-out notice is invalid you can work directly for the client without let or hindrance. The Conduct of Employment Agencies and Employment Businesses Regulations 2003 prevent an employment business from threatening you with legal action if you work directly for a client where no valid opt-out notice is in place.
I am being supplied to the client by an employment business – does this affect IR35?
Some commentators suggest that the presence of an employment business in the supply chain undermines a contractor’s claim to be legitimately self-employed. This is incorrect as many agencies have sole-supplier agreements in place with a client. If this is the case you may not be able to enter into a contract directly with a client.
Are IR35/off-payroll safe solutions involving a service provider genuinely safe?
This practice could fall foul of the Managed Service Companies legislation and may result in HM Revenue & Customs demanding tax from your company and possibly enforce the debt against your personal assets. Unlike IR35, the Managed Service Company legislation does not provide a reduction in liability for running your own business and may apply whether or not the engagement is inside or outside IR35.
Why are you fees for limited company contractors so low compared to other?
Be careful about the fees. many law firms will charge higher fees for review services in respect of contracts of more than 10 pages. The Law Place has insurance to provide legal advice in relation to the IR35 legislation, the off-payroll legislation and other areas of law. We do not charge a premium for 1 day turnaround times.
We are able to offer legal services at heavily discounted fees because we strongly believe in providing access to expert legal services to limited company contractors who can’t afford to instruct a Magic Circle firm or feel uncomfortable about taking advice from an insurer lacking qualifications in law.
Our corporate fees are £400 per hour.
Should I send my contract to be reviewed by HM Revenue & Customs?
In essence, this approach is fraught with risk. Indeed, despite denials from HM Revenue & Customs, sending your contract to HM Revenue & Customs for a free review is placing your company and yourself at their mercy.
In practice, a large proportion of contracts do not reflect the actual working practices when initially reviewed; careful redrafting and negotiating with the recruiter and end-client is often needed to correct the contract in question. This may be due to bad practice on the part of the recruitment consultant and lack of clarity by the end-client. If a contractor relies on HM Revenue & Customs’ service and has already started an engagement (note, HM Revenue & Customs does not offer a time scale) it may be too late to seek legal advice to correct the mistakes. The Law Place has acted for contractors in respect of HM Revenue & Customs’ previous review service where complaints have been made concerning excessive delay. Anecdotal evidence suggests that the new service will be just as slow and inaccurate and in the absence of new funding from the Treasury the obvious question is how HM Revenue & Customs intends to fund this service.
The most cost effective solution for any contractor would be to seek legal advice from The Law Place as soon as a contract has been offered. The costs of defending an IR35 enquiry are always much higher than a pre-emptive independent contract review. Indeed, the costs of dealing with HM Revenue & Customs correspondence in the initial phase of an enquiry alone are likely to be 4-5 times that of an IR35 Contract Review. It is clear from the new guidance that HM Revenue & Customs intends to deter contractors from legitimately operating outside of IR35 using companies and heard them towards umbrella companies. We would recommend seeking legal advice from The Law Place.