How to avoid IR35 traps

IR35 is tax legislation specifically targeted at limited company contractors, which is aimed at countering tax avoidance. If caught by IR35 you could lose out on thousands of pounds worth of income every year to the taxman. So, if you are working as a contractor how can you avoid falling foul of the rules, and ultimately IR35 investigation? Dave Chaplin, CEO and founder of Contractor Calculator, a leading website for freelancers and contractors offers his top 10 IR35 traps to avoid as a contractor.

Controlling your workload

In IR35 cases “control” has become key in determining ‘disguised employment’. You need to avoid any suggestion that your client controls you. Make sure that you only carry out the job you were hired to do, and the tasks detailed in your contract. Don’t ever let your client move you from task to task or instruct you how to complete your work.

Providing substitutes

The power to provide the client with a suitably qualified substitute is a clear indicator that you are not employed by your client and will keep you outside IR35. Aim to include a right of substitution clause in your contract or, even better, actually sending a substitute during the contract, will send a clear message to HMRC that you are, in fact, a true contractor.

Not being personally named in your contract

Ensure that you are not personally named in the contract, nor in any correspondence relating to it, as this could fall inside IR35 – the implication being you are providing your services under an employment ‘contract of service’. The contract should be with your contractor limited company, proving you are providing ‘contract for services’ as a business-to-business service provider.

Only do the tasks agreed in the contract

Taking on any work that the client offers, and not just the tasks agreed in the contract, suggests that your client is obliged to offer you work and you are obliged to take it. 

This is called ‘mutuality of obligation’, and is a strong indicator of employment. Only complete work agreed in the contract and, if alternative work is offered, either refuse to do it or get a fresh contract or contract addendum issued. Strictly avoid termination notice periods that require the client to give you work for that period.

Appraisals

Never conduct appraisals don’t allow yourself to be appraised – that’s what happens to employees, not contractors.HMRC is likely to infer that you are not in business on your own account and are, in fact, a ’disguised employee’ and therefore inside IR35.

Holidays and time off

As a contractor you should be careful about how you manage time off. Letting your clients know you are not available is professional, and means that they can plan for your absence. 

However, if you ask permission to take time off or if you are paid holiday or sick pay then it suggests that you are being controlled by the client and receiving employee benefits.

Organisational structure & systems

If you are named on your client’s organisational chart or have security/network log-ins and/or a client email address and business cards then they could suggest you are part of the client’s business, and therefore inside IR35. 

Whilst it is sometimes a necessity due to logistical reasons, it should be avoided where possible.

Exclusivity

Your contract prohibits you from working for other clients

If your client insists that your contract prohibits you working for other clients at the same time as them, this suggests that you are not in business on your own account. Get your legal adviser to negotiate out any clauses restricting your business in this way. 

The only exception is when your client insists you cannot work for any of their competitors for a given time – this is a common feature in business-to-business contracts for services.

Paying for training

If you allow your client to pay for training, this suggests that you are a part of their workforce and therefore a disguised employee. Your limited company should pay for all of your training and development.

Using staff facilities

Avoid becoming ‘part and parcel’ of their client’s organisation. Don’t use staff facilities like subsidised canteens or gyms, staff parking or even staff entrances. 

It might be inconvenient, but make sure you use the visitor’s car park, that you sign in every day, just like a visiting contractor would be expected to, and never, ever organise the Christmas party!

*Dave Chaplin is CEO and founder of Contractor Calculator, an online resource for freelancers and contractors. He is also the author of Beat IR35: The ultimate guide to IR35 for contractors, agencies and clients available here. The book provides readers with all the expert knowledge they need to stay compliant, reduce tax risk, avoid punitive IR35 taxes and successfully combat any HMRC investigation.

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