10 Reasons Your Contract May Fail the IR35 Test

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• 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

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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, theres a good chance that
  the contract, and the clients 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.

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Past Status Rulings

• HMRC may have already left its imprint on the
  clients 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, its critical that the contractor receives
  a watertight contract otherwise, the contractor
  will fail IR35.

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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 contractors supervision and
  control.
• All of these clauses are common in employment
  contracts, but they should never appear in a
  contractors business-to-business services
  contract, as it will most likely fail IR35 tests.
  

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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.

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Financial Risk

• Regular, guaranteed weekly or monthly work
  specified in a contract often appears to be more
  akin to an employees wage contract than
  professional fees paid to a contractors 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.

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Too Many Organizational Ties

• If a contractor becomes so ingrained in a
  clients 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 clients 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
  clients business.

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Implied Intentions

• The contract should always state the contracts
  and clients or agencys intentions. Not stating
  in the contract that the client and contractors
  intentions are that of a supplier and customer,
  rather than employee and employer, is not an IR35
  fail, but it does not help the contractors 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.

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