As there is a significant financial cost for contractors caught by the IR35 legislation, you should always get an IR35 opinion on your contracts. This guide also includes a select list of companies who provide IR35 contract review and drafting services.
Cost of IR35
A limited company contractor who is unaffected by IR35 rules would typically withdraw a small salary, with most of his income being derived from company dividends.
If a contractor falls within the IR35 net, the income from any given contract will be significantly lower, as his income will be in the form of a deemed payment together with a small 5% allowance to cover the cost of running a company.
For this reason, it is in your best interests to ensure your contracts are not caught by IR35.
IT contracts and working practices
The 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.
In order to escape the IR35 rules, you must make sure that both your contracts show that you are a ‘self-employed’ contractor, rather than merely a ‘disguised employee’ of the client.
Naturally, you must also ensure that the terms of the contracts reflect the true reality of your contract working practices.
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’.
IR35 Contract Review Tips
- You should make sure that an expert reviews your contract before you sign it. It will be very difficult to amend a contract once you have started work.
- Although most agencies are IR35-aware, some may be unwilling to amend terms in their contracts if they are required. This illustrates why it is essential to use professionals to handle negotiations on your behalf.
- The IR35 rules apply to individual contracts, rather than a person. A contractor may have one contract which is caught by IR35, and others which are not.
- You can also have your past contracts reviewed to see if HMRC can claim back taxes from you by virtue of your previous contracts falling within the IR35 rules.
- The Dragonfly case shows how, more than ever, you must ensure that the terms contained in your contracts actually match the reality of your working situation.
- If you have several contract renewals, it is worth having your contract reviewed even if you don’t change client, to ensure that the terms of the contracts still reflect your working practices.
- Always use a respected IR35 contract review specialist.
IR35 contract review services
- Qdos Consulting – Leading independent tax experts. Service includes a detailed and comprehensive contract review, examining each clause and highlighting how to make the contract more ‘ir35 friendly’. Reviews typically completed within 3-5 days.