Qdos Contractor, the specialist tax advisory consultancy for contracting professionals, has emphasised the care that limited company contractors should exercise in relation to their contracts to demonstrate due diligence should HMRC launch an IR35 investigation. For contractors who find that a contract they’re engaged in falls within IR35, Qdos suggests working for the remainder of that project via a trustworthy umbrella company, which will deduct employee tax and NICs automatically on a PAYE basis.
The first step recommended by Qdos is to have contracts reviewed by a recognised IR35 expert. This will provide them with all the evidence they would need to provide should HMRC launch an inquiry. The measure is a judicious one, as recruitment consultancies typically issue standardised contracts to contractors which may not truly reflect the real details of the engagement. The reviewing expert will be able to pinpoint areas of concern and suggest some careful re-wording and any additional clauses.
Secondly, contractors should not rely solely on the terms of the contract. Working practices should also be carefully reviewed to determine true IR35 status. Even when contracts cover every essential employment status test, if they don’t reflect actual working arrangements, the contract will have little standing in a formal inquiry. HMRC always goes beyond the contract to examine real working practices, typically interviewing end-clients in the process.
When interviewing end-clients, HMRC inspectors will be exploring all of the key employment status tests, especially the right of substitution/degree of personal choice, the degree of control and Mutuality of Obligation. Contractors should therefore establish early on exactly how their end client views their employment status.
By having contracts professionally reviewed and speaking directly to end clients, contractors can demonstrate to HMRC officials that they have practised due diligence in determining where their status lies. Failing to exercise reasonable care in this respect can result in HMRC imposing penalties of up to 100% of any tax due if they deem the contractor to be inside IR35.
Should a contractor find that, upon reviewing the contract and working arrangements, they are inside IR35, Qdos Contractor representative Kate Cox cautions against panic. It’s far better to come to this conclusion before the HMRC undertakes an inquiry. It simply means paying the relevant taxes due, which will be higher than outside IR35 arrangements.
Cox writes: “For those likely to be operating in mostly inside contracts, many choose to use an umbrella company. There are a number of reputable providers, however caution is advised with umbrella companies who might be offering contrived payment schemes, resulting in paying little tax and which might seem too good to be true.”