Are you a Contractor working through a Personal Service Company? Let’s make sure your contract is “IR35 friendly”

As a self-employed Contractor working through a Personal Service Company (PSC) there are a few things to keep in mind when you put a Contract in place for the services you provide. If not done properly, your company could potentially be considered as trying to avoid paying correct tax and national insurance on your income.

The best thing you can do for your work situation is to make sure that the contract you put in place doesn't make you look like a false self-employed contractor. To do this, get the help of an expert, who can ensure your contract follows the HMRC guidelines for what constitutes a genuine self-employed contractor. And here at Accounting Minds we can clarify all those important points for you and help you determine your correct status in relation to IR35.

What is IR35?

IR35 is a law that was introduced by the 2000 Finance Act as part of an anti-avoidance measure, to prevent workers who should be paid as employees, from avoiding payroll taxes by claiming self-employment status.

It essentially seeks to stop companies from disguising employment contracts as ‘false self-employment’ so they can avoid paying national insurance contributions (NICs) and income tax on the employee’s earnings.

Initially you could think of IR35 as a tax law that applies to contractors only. But in April 2021 HMRC has introduced some changes to off-payroll working rules for clients, where all medium and large-sized clients, which engage contractors working through their own limited company, are now responsible for deciding the employment status of workers, including contractors, even if they are operating through an agency.

Therefore it's very important that both sides are comfortable that they abide by HMRC rules because if they don't, there could be big problems later on down the road:

·       Contractors who get caught up in IR35 may end up paying more tax than necessary—and even worse, they could lose some or all of their earnings for those years

·       Employers who fail to follow IR35 guidelines will face fines from HMRC

Correctly worded “IR35 friendly” CONTRACT FOR SERVICES should assist both sides in getting comfortable, but it is also important to ensure Contractor’s working practices mirror the written contract.

A good CONTRACT FOR SERVICES should clearly demonstrate that you are genuinely self-employed.

It should be written in plain English, be specific and taking into account specific HMRC rules. Hence the best contracts should be prepared by qualified accountants providing service to contractors working under IR35 legislation and reviewed by a lawyer who has experience in this field.

Here at Accounting Minds we always advise to our clients that it is important that the working of the contract is backed up by working practices that in reality reflect those of a self-employed individual. At best, your contract should have the elements listed below, which would indicate that it is not subject to IR35 rules:

- the agreement should specifically confirm your ability to provide a substitute if you were unable to work due to illness or other circumstances outside of your control (such as adverse weather conditions). In this instance, it makes sense that the Client pays an amount equivalent to that which would otherwise have been paid if you had attended the assignment full-time, plus reasonable expenses incurred by yourself in recruiting and paying someone else on an interim basis

- that the Client cannot exercise any "supervision, direction or control" over you during each assignment

- the Client is not obliged to offer you an assignment, and similarly, you are not obliged to accept any such assignment, indicating that you have more flexibility than usual Employee, who will be dictated by Employer what to do each day.  Also neither party is required to offer or accept assignments on a continuing basis

- that all equipment needed for performing services is provided by yourself

- confirmation of your status as an independent contractor rather than an employee, which has been confirmed in writing by both parties.  This means being able to demonstrate that you do have control over how and when you do the work – for example, by agreeing with the Client that you can take time off during the assignment without their consent

- you would bear the cost of all training required

- confirmation that the Client sees you as an independent contractor and not as an employee, so you will be responsible for paying your taxes over to HMRC (including stating the Client bears no liability for your tax)

- confirmation that you are required to obtain your own insurances such as Public Liability and Professional Indemnity insurance

Self-employment and IR35

IR35 is a complex piece of legislation that can be difficult to get right. The rules might wary for each industry, contract and employee. IR35 rules can also change from year to year as the legislation evolves.

In addition, HMRC may do an IR35 enquiry and call on witness statements from you or employees in the same office or working on the same project as you (which isn't unheard of). Hence here at Cannon Accountants we always stay on top of legislation and ensure our clients apply the best recommended practice. We provide clients with everything required to put in place an “IR35 friendly” contract and advice them to always demonstrate that they operate as an independent contractor in business on a day to day basis.

We also suggest as a best practice to keep a diary to evidence factors showing you are treated differently to employees working at the client site or demonstrate control over your work. This could be notes of times when you have exercised control over how, when or where a project is delivered; notes of additional work undertaken alongside a contract; notes of expenses incurred when searching for new work, etc. (more evidence factors ideas will be provided directly to the clients of Cannon Accountants).

Conclusion

We have taken a look at some of the most important elements of the “IR35 friendly” contract and evaluated them to help you make your decision. But please note these are just a few of the many important points which should be taken into consideration, and they all have their own unique characteristics that make them a very important part of the contract arrangement. If you need more help please contact us at info@cannonaccountants.co.uk, we’ll be happy to tailor “IR35 friendly” contract for your needs!