HMRC will be able to apply significant penalties, up to 100% of the assessed tax due, in the event that a contractor is unable to demonstrate that reasonable care has been taken in assessing their IR35 status.
It is essential that contractors have a full professional contract review, including a review of working arrangements, to be in a position to demonstrate that reasonable care has been taken and therefore avoid these penalties.
Any review needs to be supported by a document outlining why the conclusions were reached. This will provide your evidence that you have taken reasonable care.
We also know that whilst there is no direct link between IR35 and the AWR it is widely accepted that assignments outside of IR35 are likely to be considered as outside the scope of the AWR.
This could provide enough motivation for end clients to grasp IR35 and recognise that it is now in their interest to ensure, where appropriate, assignments are taken outside IR35. This can have significant cost savings and dramatically reduce over risks.
Confirm Working arrangements from the very start
There are now more reasons than ever why it is in the best interest of the end clients, agencies and contractors to have working arrangements confirmed at the outset.
Structuring the Was – Agreeing and documenting the working arrangements for any particular assignment is a contract that should contain all the legal aspects defining the obligations between the contractor and the agency, such as restrictions etc. The contract should refer to a working arrangements schedule for reference to all aspects that define the actual working relationship between the contractor and the end client.
Agencies must ensure that their contract templates do not conflict in any way with the working arrangements schedule. This allows the schedule, as a stand alone document, to be used to assess IR35 status.
In the same way that case law is a matter of interpretation, with HMRC often at odds with others, the same can be said of the status tests. The courts give indications of the weight they apply to particular tests but these can vary depending upon the facts of the individual case and over the years the level of importance given to particular tests can change significantly.
Each time HMRC considers status they issue form Annex A which lists the factors that HMRC consider relevant as follows:
- whether there is an ultimate right of control on the part of the engager over what tasks have to be done, where the services have to be performed, when they have to be performed and how they have to be performed
- whether personal service is required
- whether the worker has the right to provide a substitute or engage helpers
- who has to provide the equipment and/or materials
- whether the worker has a real risk of financial loss
- whether the worker has the opportunity to profit from sound management for example by reducing overheads and organising work effectively
- the basis of payment
- whether there are ’employee type’ benefits for example sick pay, holiday pay etc
- whether the worker works exclusively for the engager
- whether the worker is part and parcel of the engagers business or organisation
- whether there is a right of dismissal by notice of a specific length
- factors personal to the worker for example, number of engagements and business organisation
- the intention of the engager and worker as regards employment status