IR35 Factors, IR35 Compliance, are you caught?

In light of the Dragonfly IR35 verdict, a leading IR35 status expert suggests that contractors should review their IR35 status and mitigate their exposure to risk.

The recent landmark Dragonfly Consultancy IR35 case showed not only that the working practices of the contractor involved did not reflect the wording of his contract, but also that the two contracts in the case (one between the agency and client, the other between the agency and the contractor) did not mirror each other.

The Dragonfly case shows how there is no point having an 'IR35 proof' contract if the way you actually perform the role indicates that your working practices are more akin to those of an 'employee'.

The expert view

Leading IR35 and employment status experts, Bauer & Cottrell (B&C), say that the key message from the Dragonfly case is that the contracts in the chain did not reflect the working practices and consequently the parties understanding of the reality of the relationship. Dragonfly shows that it is absolutely vital to formally consider and review your IR35 status for the past the present and the future.

In a nutshell, contractors are advised to review their IR35 status and mitigate their risks.

What should contractors do now?

B&C recommend that contractors consider the following points in light of the Dragonfly ruling.

Relevant Engagements
IR35 concerns "relevant engagements" which unfortunately means each individual contract and extension. You should have each contract reviewed together with the working practices. If a contract has been extended resulting in any changes to the services provided and/or the working practices this will also need to be reviewed. This action will also protect against the new HMRC penalty regime which comes into effect in April 2009 (covering returns from 2008/2009) as it will be evidence of taking "reasonable care" as confirmed by HMRC.

Working Arrangements
Contracts should accurately reflect the working arrangements and negotiation of amendments to contracts should only be undertaken where appropriate and never retrospectively. The Judge in Dragonfly makes reference to changing wording in contracts and such "change in wording owed more to anxiety about the possible impact of the IR35 legislation than to any real change in the position on the ground". This point is shouting that it is absolutely vital that any IR35 contract review looks at the working arrangements as well as the written contracts and that the contracts reflect the reality of the situation.

Independent IR35 Reviews
IR35 Reviews should be undertaken by independent providers. Care must be taken when negotiating changes to contracts as where accountancy services providers review the contracts and negotiate changes with agencies/clients HMRC considers this could amount to "influence and control" under the MSC rules.

Due Diligence
You should undertake ongoing due diligence e.g. documenting the details of the relationship and the differences between you and client staff, etc. and perhaps most importantly should act at all times like a person in business.

Ask Questions
You need to ask the right questions of the agencies and the end clients from the outset of the engagement about the contracts and the working arrangements.

Also read our latest article on IR35 and the new HMRC penalty regime, which comes into play on 1st April 2009.

Insurance - You may want to consider tax investigation insurances.

Alongside Bauer & Cottrell's existing IR35 status review service, they also have a new service - 'Contractor Guardian' - which looks after all your IR35 contract reviews throughout the year at preferential rates. You can find out more about these services here.