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IR35 Contract Review

IR35 Contract Review Solicitors

IR35 is a set of tax rules designed to prevent tax avoidance by individuals working as contractors, who otherwise would be considered employees if they were providing their services directly to clients. The legislation makes sure such individuals pay the same income tax and National Insurance contributions as employees.

Complying with IR35 is crucial to avoid significant tax liabilities and penalties. Non-compliance can lead to financial losses and legal issues, affecting both contractors and the businesses that hire them.

At Lawhive, our network of small business lawyers helps contractors, freelancers, and businesses comply with IR35 rules. They are on hand to provide comprehensive contract reviews to make sure your working arrangements comply with IR35 regulations.

What is IR35?

IR35 (off-payroll working rules) is a UK tax legislation designed to identify individuals who work similarly to employees but operate through their own limited company or another intermediary.

It was introduced to prevent tax avoidance by contractors who would otherwise be considered employees if they provided their services directly to clients rather than through an intermediary like a personal service company.

If a contractor is deemed to be inside IR35, they are considered an employee for tax purposes. This means the client (or intermediary) must deduct income tax and National Insurance contributions from their pay, similar to an employee.

If a contractor is outside IR35, they are considered self-employed. As such, they can manage their own tax affairs.

How is IR35 status determined?

IR35 status is determined by:

• Whether the client controls how, when, and where the work is done;

• If the contractor can send a substitute to do the work;

• Whether the client must offer work and for the contractor to accept it.

How does IR35 affect contractors?

If a contract falls inside IR35, the contractor is considered an employee for tax purposes and must pay income tax and National Insurance contributions.

The client or agency paying the contractor will make these deductions before the contractor receives their pay. This can significantly reduce their take-home pay because they won't be able to take advantage of the tax efficiencies typically available to limited company contractors.

Further, contractors deemed inside IR35 don't receive employee benefits like paid leave or sick pay.

Therefore, it's important to make sure contracts and working practices reflect your self-employed status as a contractor if you aim to be outside IR35.

Who is responsible for determining a contractor's IR35 status?

For contractors working with public sector clients or medium to large private sector clients, the client is responsible for determining IR35 status. These clients must assess whether the contractor would be considered an employee if directly engaged, and they need to issue a Status Determination Statement to the contractor, outlining whether the engagement is inside or outside IR35.

If the contractor works for a small private sector client, either they or their intermediary (such as their personal service company) is responsible for determining IR35 status. This is because small businesses are exempt from the off-payroll working rules.

What happens if a contract is deemed insider IR35?

If the contract is deemed inside IR35, the client (or fee-payer) must deduct income tax and National Insurance contributions from the contractor's pay, similar to how these deductions are handled for employees.

Can you challenge an inside IR35 determination?

You can challenge an inside IR35 determination by writing to your client explaining why you believe their Status Determination Statement is incorrect. This starts the client-led disagreement process, where the client must reconsider their determination.

Your client must respond to your challenge within 45 days, either by issuing a new Status Determination Statement with revised conclusions or by explaining why the original determination stands. During this time, the initial determination remains in effect.

An independent IR35 contract review by a specialist can provide a detailed assessment of your contract and working practices, helping you present a more compelling case to your client, and increase the chances of a successful challenge.

Why choose Lawhive for your IR35 contract reviews?

Our network of experienced solicitors specialise in employment law. They provide quick, affordable, detailed professional reviews of your contracts to ensure they meet IR35 requirements.

Your lawyer won't just skim through your contracts. Their reviews cover every aspect, from the written terms to the actual working practices, making sure that every detail aligns with IR35 regulations.

With Lawhive's expert assistance, you can focus on your work without worrying about potential IR35 issues.

For more information and to ensure your contracts are IR35 compliant, contact us today.

What is an IR35 contract review?

An IR35 review is a thorough examination of a contract to determine whether it complies with IR35 legislation. The purpose of this review is to establish whether the working relationship described in the contract classifies the contractor as genuinely self-employed (outside IR35) or as an employee for tax purposes (inside IR35).

Specifically an IR35 contract review will consider:

1. Who has control over how, when, and where the work is done;

2. Whether the contractor has the right to send a substitute to perform the work;

3. Whether the client must provide work and for the contractor to accept it;

4. Whether the contractor bears financial risk;

5. Whether the contractor uses their own tools and equipment;

6. If the contractor is integrated into the client's organisation.

An IR35 contract review helps determine IR35 status by looking at both the written terms of a contract and actual working practices. The review provides a detailed analysis and identifies any areas where the contract may suggest an employment relationship rather than self-employment.

This examination makes sure that contractors and businesses are aware of their compliance status and can make necessary adjustments to avoid potential tax liabilities and penalties.

Why is an IR35 contract review important?

If HMRC determines that a contractor should be classified as an employee rather than self-employed, the contractor or hiring business could face:

• Payment of unpaid taxes and National Insurance Contributions;

• Interest and penalties on the unpaid amounts.

Persistent non-compliance or fraudulent behaviour can also lead to legal action, resulting in further penalties.

Here are some real-life examples that highlight the importance of IR35 compliance:

1. The Department for Environment, Food & Rural Affairs (DEFRA) faced a significant tax bill of £86.5 million due to incorrect IR35 assessments of contractors over multiple years.

2. NHS Digital was fined £4.3 million for using contractors incorrectly between April 2017 and March 2022.

3. Several high-profile cases involving BBC presenters resulted in substantial back taxes and penalties after HMRC reclassified their contract as inside IR35.

These examples illustrate how non-compliance can lead to hefty financial penalties and public scrutiny, underscoring the importance of making sure your contracts are thoroughly reviewed and compliant with IR35 regulations.

Step-by-step process of an IR35 contract review

1. Initial consultation

The IR35 contract review process usually begins with an initial consultation. During this stage, your lawyer gathers essential information about your contract and working arrangements.

This consultation helps them understand your situation, including the nature of your work, your relationship with the client, and any concerns you may have regarding IR35 compliance.

2. Contract analysis

After the initial consultation, your expert solicitor will conduct a detailed analysis of your contract. They examine the key clauses that impact your IR35 status, such as control, substitution, and mutuality of obligation.

This analysis helps identify any potential issues that could classify you as inside IR35 and suggest necessary amendments to align your contract with IR35 requirements.

3. Working practices review

As well as reviewing the written contract, your solicitor will also assess your actual working practices. This involves evaluating how you interact with your client on a day-to-day basis.

For instance, they look at who controls your work, whether you can send a substitute to perform your duties, and if there are mutual obligations between you and the client. This ensures that your working practices match the terms outlined in your contract, reinforcing your self-employed status.

4. Report generation and recommendations

Once the contract analysis and working practices review are complete, you will get a report outlining your solicitor's findings. This includes a summary of their assessment, highlighting any areas of concern and providing clear recommendations to ensure your contract is IR35 compliant.

To arrange an IR35 contract review with one of our experts, contact us today.

Key elements of an IR35 review

Throughout an IR35 contract review, your solicitor will look at several key factors that determine IR35 status. These are:

1. Control

2. Substitution

3. Mutuality of Obligation

4. Financial Risk

5. Provision of Equipment

6. Exclusivity Clauses

7. Length of Engagement

8. Integration into the Client's Business

Who has control over how, when, and where work is done?

One of the primary factors in determining IR35 status is the level of control the client has over the contractor.

It suggests an employment relationship if the client dictates how, when, and where the work should be done.

For contractors to be considered outside IR35, they should have significant autonomy in managing their tasks, similar to running their own business.

The right to send a substitute

The right to send a substitute to complete the work is a key indicator of self-employment. If a contractor can provide a suitably qualified substitute to carry out their duties, it supports the argument that they are running a business and not working as an employee.

The contract should state this right clearly; ideally, the contractor should demonstrate it in practice.

Obligations between client and contractor

Mutuality of obligation is a fancy way of saying whether the client is obliged to offer work and whether the contractor is obliged to accept it.

In an employment relationship, both parties are typically bound by these obligations. However, for a contractor to be outside IR35, there should be no ongoing obligation for the client to provide work, nor for the contractor to accept it.

This lack of mutual obligation supports the contractor's status as a self-employed individual.

Financial risk

Taking on financial risk includes situations where the contractor invests in their own equipment, incurs business expenses, or is responsible for rectifying defective work at their own costs.

Contracts should reflect these risks, as they demonstrate a genuine business-to-business relationship.

Provision of equipment

If a contractor provides their own tools and equipment, it suggests self-employment.

Conversely, if the client provides all necessary equipment, it leans towards an employment relationship.

Exclusivity clauses

Clauses that restrict a contractor from working with other clients can imply employment. An outside IR35 contract should allow the contractor to work with multiple clients.

Length of engagement

Long-term engagements with a single client can be scrutinised more closely for IR35 status.

Shorter, project-based contracts are more indicative of self-employment.

Integration into the client's business

If the contractor is treated similarly to employees, participating in team meetings and using the client's e-mail address, for example, it may indicate an employment relationship.

Contract and working practices should ensure the contractor remains distinct from the client's employees.

What are the penalties for non-compliance with IR35?

If HMRC decides that you should have been inside IR35, you will need to pay all the unpaid income tax and National Insurance contributions with interest accrued from the date the taxes were originally due until they are paid.

HMRC may also issue penalties based on behaviour.

• If they decide you were careless in determining your IR35 status but did not deliberately mislead, you could face a penalty of up to 30% of the unpaid tax.

• If you knew you were inside IR35 but chose not to act accordingly, the penalty can be up to 70% of the unpaid tax.

• If you actively tried to hide your true employment status, the penalty can be as high as 100% of the unpaid tax, doubling your tax liability.

To avoid these penalties, you should take reasonable steps to determine your IR35 status. This includes seeking advice from tax professionals and regularly reviewing your contracts, which is something our small business lawyers can help with.

Contact us today for a free case evaluation and quote.

How can I make sure my working practices match my contract terms?

Clearly define project-based work

Your contract should outline specific projects or tasks with clear deliverables and deadlines.

Make sure you actually perform work according to these project outlines rather than engaging in ongoing, employee-like roles.

For example, if your contract specifies you're working on a particular project, avoid taking on additional tasks that fall outside this scope without formal amendments to the contract.

Exercise control over your work

If your contract says you have control over your working hours and location, make sure this is reflected in your daily practices.

Avoid following a fixed schedule set by your client and work from your own premises whenever possible.

Use substitutions

Even if you don't use a substitute often, you should make sure this right is genuine and exercisable.

Keep a list of potential substitutes and maintain communications that show your ability to deploy them if needed.

Minimise integration with the business

Do not use the client's internal email systems, attend regular employee meetings, or benefit from company perks like holiday pay or health insurance.

Instead, use your business email and maintain a separate identity.

Take on financial risk

Show that you bear financial risk by providing your own tools and equipment, investing in your training, and correcting any defective work at your own expense.

Common IR35 contract pitfalls

Certain contract clauses can unintentionally suggest an employment relationship rather than a self-employed one.

How to amend contracts to ensure IR35 compliance

To avoid these common pitfalls, consider the following amendments:

• Specifying that the contractor has the freedom to determine how, when, and where the work is done;

• Including clear substitution clauses that allow the contractor to appoint a substitute to carry out the work;

• Amending clauses to indicate there is no obligation for the client to offer continuous work, and no obligation for the contractor to accept it;

• Clearly outlining any financial risks borne by the contractor, like liability for mistakes and responsibility for providing their own equipment and tools;

• If the client must provide equipment, justify it within the context of the project;

• Ensure the contract positions the contractor as an external service provider.

It's important to note that HMRC doesn't just assess contracts to decide on IR35 status, they also look at the reality of the working relationship and whether it aligns with what is written in the contract.

Therefore, the way a contractor works day to day should match the terms of the contract.

It's also important to regularly review and update contracts and working practices to ensure ongoing compliance with IR35 regulations, especially if the scope of work or the nature of the working relationship changes.

How often should I get my contracts reviewed for IR35 compliance?

You should get your contracts reviewed:

• Every time you start a new contract;

• When making changes to an existing contract;

• Periodically during long-term contracts;

• If your client provides a Status Determination Statement that you believe is incorrect;

• When new rules or guidelines are introduced.

Regular reviews help demonstrate that you have taken reasonable care to determine your IR35 status, which is important for avoiding potential penalties from HMRC.

Benefits of using Lawhive for IR35 contract reviews

At Lawhive, you receive expert legal advice from solicitors who specialise in IR35 legislation. Our network of legal professionals understands the complexities of IR35 and is equipped to provide precise guidance tailored to your specific situation.

Your solicitor will ensure your contracts comply with the latest IR35 regulations, protecting you from potential tax liabilities and penalties.

Tailored recommendations

Every client is unique, and so are their contracts. We offer tailored recommendations to suit your particular needs. Our detailed contract reviews identify any areas that might be problematic under IR35 and suggest specific amendments to ensure compliance.

This personalised approach helps you maintain your self-employed status where appropriate and ensures your contracts are robust against HMRC scrutiny.

Ongoing support and guidance

We are committed to providing ongoing support and guidance beyond your initial IR35 contract review. Your solicitor can assist you in implementing the recommended changes if you wish and can offer further advice for competitive fixed fees to help you stay compliant with IR35 as your working practices or contracts evolve.

Cost-effective solutions

We understand the financial constraints many contractors and small businesses face. As such, we offer cost-effective solutions that provide the same level of expert legal advice as traditional law firms but at a fraction of the cost. Our easy-to-use online platform streamlines the process, making it more affordable to access legal help without compromising on quality or thoroughness.

By choosing Lawhive for your IR35 contract review, you benefit from expert legal advice, tailored recommendations, ongoing support, and cost-effective solutions.

Our network of dedicated lawyers is here to help you with IR35 and make sure your contracts are compliant, providing you with peace of mind and protecting your financial interest.

Contact us today to learn more about our IR35 contract review services and how we can assist you.