Practical steps to review IR35 status and mitigate risks

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 the working practices of the contractor involved did not reflect the wording of his contract.

Crucially, 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.

This article was first published in 2009, and updated in 2019.

The expert view

The Dragonfly case shows how there is no point in having an ‘IR35-proof’ contract if the way you perform the role is more akin to that of an ’employee’.

Employment status experts, Bauer & Cottrell told us that contractors should review their IR35 status and mitigate their risk.

What should contractors do now?

The IR35 consultancy recommends 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 also protects against HMRC’s tougher penalty regime which came into effect in April 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 the Dragonfly case referred to changing the wording in contracts and said:

… 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 underlines how vital it is that any IR35 contract review looks at the working arrangements as well as the written contracts.

Crucially, the contracts must reflect the reality of the situation.

Independent IR35 Contract Reviews

IR35 contract reviews should be undertaken by independent providers.

Care must be taken when negotiating changes to contracts. When accountants 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. Most importantly, you should act at all times like a person in business.

Ask Questions

Ask the right questions of the agencies and the end clients from the outset of the engagement about the contracts and the working arrangements.

Protect yourself against an HMRC IR35 investigation

Award-winning Qdos IR35 insurance – from just £99 per year. Covers £50,000 of legal costs + outstanding tax liabilities if you opt for TLC35. Contract review service also available.

Last updated: 23rd January 2024