There are case histories where HMRC has applied IR35 legislation, been challenged in the courts and won, leading to costly backdated tax bills, most notably Dragonfly Consulting Limited (2008). The considered whether the director and owner of Dragonfly, was a disguised employee of his end client for certain assignments he worked on and therefore captured by IR35. The judge found that he was, which resulted in a £99,000 bill for unpaid tax. Below we look at some key points to IR35 post-Dragonfly and consider a Case Study to highlight the effectiveness of good practice.
Since the introduction of IR35 in 2000, Brookson has continued to express the importance of this legislation to its customers. We continue to follow and analyse cases and provide updates to ensure complete compliance for all our customers. Some of these cases are considered in this section.
IR35 post-Dragonfly key points to good practice
We have listened carefully to the response from the contracting industry and the concerns of our customers since the judgment in favour of HMRC. In response, we have provided a set of key points to guide you through the issues post-Dragonfly.
1. Ensure your contracts are accurate and consistent
It makes little sense having a contract that states that you will be subject to the control of the client, or that the client's processes and procedures will apply to you when they don't in practice.
In addition, make sure that the upper level contract (i.e. the contract between the agency and the client) does not contain anything that contradicts your contract with your agency or the way you intend to work on the assignment.
2. Make sure your client thinks the same way you do
If your client sees you as an extension of its own workforce, the company is more likely to control what you do and treat you as an employee. Make sure they know that you are engaged for a specific reason and that they treat you accordingly - throughout your assignment. If the client has more work for you, make sure you put a separate contract in place.
3. Ensure that the client’s representative views you as an independent consultant, not just part of the employed workforce
This is particularly important where your client representative is different from the individual who hired your services at the outset of the project. If necessary, provide a copy of your contract to the client representative to avoid any misunderstandings regarding the extent of the services you are providing.
4. Demonstrate that you are treated differently from your client’s employees, both in terms of the services you provide and how you perform them
Different pay and benefits will not be enough on their own. Flexible working, assignments for other clients, investing in your own training, development and equipment, working on a specific package of work for a fixed fee and/or a fixed period, are all good ways of showing that you are truly independent.
5. Working as part of a team does not automatically render you a disguised employee of the client
However, it is essential that you agree the scope of the work you undertake at the outset of the assignment. Being continually allocated further work by the client - particularly without putting in place additional contracts - could show that you are being treated as an employee. If further work comes up, make sure you put a contract in place before you start working on it. Quote a fixed price or overall fee estimate up front wherever you can.
6. Provide a substitute
Not only does providing a substitute give unequivocal evidence that you are not obliged to offer a personal service, and therefore cannot be a disguised employee, it can also enable you to profit further from the assignment by supplying cheaper labour to perform the services on your behalf.
7. Project based assignments are significantly better than period based ones
Being engaged on a specific project enables you to quote a fixed fee and work flexibly as long as deadlines and project completion dates are met. However, being engaged on an ongoing basis may suggest you are only there until the client recruits a permanent employee to do your job. This may indicate that the company is treating you as if you were that individual until someone permanent comes along which can potentially make you a disguised employee.
8. Manage your own assignments
Employees are generally contractually obliged to give up their time for a fixed number of hours each day/week, but as an independent contractor, you should determine the hours required to complete the work. It is important that you take control over managing your assignments and don’t rely on being allocated work. This should also enable you to quote a fixed fee for the project and/or undertake work for other customers along side this assignment.
9. Calling yourself a contractor and not receiving holiday or sick pay are not enough on their own to prove that you are not an employee of the client
Your working practices and other terms of the contract must indicate that you are self-employed. This could involve you showing that you have financial risk in terms of bad debts, rectify work at your own cost and invest in your company, all good ‘badges of trade’.
10. Working for multiple clients and investing in your own company is still a good way of demonstrating that you are in business of your own account
The more clients you work for, the easier it is to demonstrate that you are self employed, whereas only having one client as your sole source of income for a lengthy period may suggest that you are employed by the end client. To counteract this, pay for your own training, provide as much of your own equipment as possible and advertise your services in trade magazines or the Yellow Pages.
IR35 Case Study
During his most recent Refresher Employment Status Assessment (RESA) as a Brookson customer, David’s information raised two areas of concern. He confirmed that he had agreed to work on several new projects with his end client, while he could not demonstrate that he was treated in any way differently to the employees of his client.
One assignment, one contract: David had not realised that to protect his IR35 status, best practice would be to arrange for paperwork to be in place to cover individual projects. Establishing separate contracts for each project enables David to show, from the outset, that he is engaged for specific services and, that he negotiated the price for each project undertaken for the end client.
David was clearly in control of the work he undertook however, by only having one contract in place for all the work he was carrying out David could be viewed as being controlled by his end client.
Different treatment compared with client's employees: As David was unable to provide any specific differences in the way he was treated compared to that of the client’s employees, Brookson looked back at previous reviews where he had demonstrated IR35 compliance.
One of the differences David had mentioned previously was that he was excluded from any training the client offered to employees. David felt aggrieved about this, but undertaking and paying for his own training and development provides clear evidence that he is in business of his own account, investing in his skills and making his services more marketable to new clients.
The outcome: Initially David’s RESA showed there was a risk that he would struggle to demonstrate that he was not working as a disguised employee of the client. David obtained paperwork from his client that accurately reflected the projects on which he was engaged and also provided additional information that clearly demonstrated he was in business of his own account. It changed the way David viewed his work and gave him information he could use to manage future assignments and protect his dividend income.