7 Steps to Stamp Out IR35.

Why do I need to Worry about IR35?

Back in July 2019 the UK Government published draft legislation that confirmed the rules (known as IR35) which have applied to public sector since April 2017 are to be extended to the private sector from the 6^th April 2020.

Due to the COVID-19 Pandemic this legislation has been delayed until 8^th April 2021. Giving you more time to prepare for the incoming legislation. But there is not much time left to prepare.

Some of the changes coming in April 2021 include

1.) It will be the responsibility of the end client to determine the status of the Limited Company or Personal Service Company in relation to IR35 (off-payroll) status.

2.) HMRC are introducing a new term referring to the IR35 (off-payroll) decision. This term is “status determination statement” (SDS) and must be passed down from the client.

3.) There will be a small business exemption in line with the Companies Act 2006 definitions. A small company would be one that has a turnover of less than £10.2m, a balance sheet of less than £5.1m and up to 49 employees.

4.) HMRC have a CEST tool available to Check Employment Status for Tax. This tool however is not compulsory, and neither is there a formal appeal process for it.

How does the contractor stay outside of IR35?

I find there is a lot of information on IR35 for the end client to find and prepare for upcoming IR35 legislation. But there is limited information for the contractor to find. The following information is based on what I am doing to prepare for the incoming IR35 legislation. It is by no means a definitive guide on how to prepare for the upcoming IR35 legislation. You should also do your own research on how IR35 will affect you and the role that you carry out.

The 7 steps to staying outside IR35 are:

Have the Mindset of Someone in Business.
Have a Limited Company.
Establish your Terms of Engagement.
Set your Working Practices and Appearances.
Get a Website and Email Addresses.
Provide your Own Equipment.
Have the Right to Substitution.

Step 1 to staying outside IR35.

Have the Mindset of someone in business.

Have the Right Mindset for your approach to IR35.

Having the right mindset, I think, is crucial to your approach to IR35. The mindset you have will determine how you will approach your relationship to your customer or employer, and this will ultimately determine your IR35 status.

You need to choose the right mindset for yourself. Be honest with yourself and determine whether you have the mindset of an employee, or the mindset of someone in business.

The Mindset of Someone in Business.

If you have the mind set of someone in business then you will be offering services or goods to multiple people or businesses. You will most likely not be thinking about giving up some of your time to one employer for a payceck at the end of the month. You will be thinking about how you can help other people and businesses reach their goals.

This is not to say that you will not do anything that they ask, but you do have a choice in doing it. It maybe something that you do not have the required skills for. There is nothing wrong in turning down work that is not your forte.

The Mindset of an Employee.

If you have the mindset of an employee then you will do any task set to you by your employer. You give up just your time and the skills you have to be rewarded at the end of the week or month with a paycheck. There is nothing wrong with this mindset. There is nothing wrong with being an employee. If this is what you want, then fine.

Having this mindset will mean that a company will see you as an employee. They will treat you like an employee of theirs. After April 2021 the company will most likely determine that you, as a freelancer, should be within IR35.

Having the right mindset for yourself is important. Knowing which one you have will be an important part of determining whether you are will be within IR35 or outside. The mindset that you have will ultimately determine how you are treated by your employer/customer.

The Importance of how the Client views you “the contractor”

From April 2021 it will be the responsibility of the end client to determine the status of the Limited Company or Personal Service Company in relation to IR35 (off-payroll) status.

This ultimately means that the end client needs to determine whether the services you provide are that of an employee or that of a business. If you are wanting to stay outside of the IR35 legislation, then you need the end client to view you as a business.

This is the way that I want my end clients to view me, or more importantly view my company. I view my end clients as customers. Customers that are in need of the services that I can offer.

And I think this is the way you need to see it if you want to stay outside of IR35.

Step 2 to staying outside IR35.

Set up a limited company.

If you are serious about being in business then this is the way to go, I think. I also think it is best to be VAT registered. A limited company is a legal entity. And it is the limited company that will be responsible for the work it carries out. Not the individual carrying out the work.

The directors of the limited company will determine the services or products that are on offer or can be carried out.

The Limited Company will be your employer. The directors of the limited company will be responsible for ensuring the company is run correctly and legally. Ensuring that all the accounts are correct and the tax due paid. The directors will also need to ensure that adequate business insurance is in place.

Step 3 to staying outside IR35.

Establish your terms of engagement.

Any limited company will have a set terms of engagement or terms and conditions of business. These are designed to both protect the limited company and guide the customer in what they can reasonably expect from the service or product they are purchasing.

There are loads of websites and companies offering to write specific business terms for you. Only you will know what you want your business to do and what sort of term of business that you need.

Step 4 to staying outside IR35.

Set your working practices and appearances.

As the limited company is your employer, it should set the core hours that you do business for. You may want this to be in line with your client or you may not want it to be in line with your client’s core hours. This may not be a straightforward procedure.

But, this is for you to decide and set out in any documentation or contracts that you enter into. Remember though, that you do need to keep your client happy, and that might mean agreeing or working different times to suit. But try and stick to your core hours. Keep a time sheet or diary of hours worked on a project.

Most likely you will be required to work from your client’s offices. But if you can work from your own offices (or home) then do so whenever you can. If you have set up an office in your home make sure you can work efficiently from it and record your working time there on timesheets or a diary.

This type of documentation will be very handy for presenting to future clients.

Step 5 to staying outside IR35.

Get a Website and email addresses.

Having a website is a great way of establishing what you can offer a client. They can see the services or products that you offer. You can also set out the prices or rates of the services or products that you offer.

Crucially, this means that you or your company are open to working for more than one client. Contracts of employment often stipulate that you can not work for anyone else.

Having a website also means that you can have business email addresses too. You can usually setup lots of email addresses too. Make sure that you use these in all your correspondence with your client.

Try not to use your clients email address if they provide you with one. Especially if they do not provide a computer for you to use.

Step 6 to staying outside IR35.

Provide your own equipment.

The limited company (your company) you work for should supply all the equipment that you need to carry out your job. The services that the limited company provides should have rates built up that allow for the provision of the equipment needed.

Employees do not supply equipment to carry out their roles. Employees are given the equipment they need to complete their roles.

To put it simply. You would not expect to provide the tools for a plumber you had called out to fix a leaking tap.

Step 7 to staying outside IR35.

Have the right to substitution.

Being able to provide someone else to carry out your roles is important. This is a clear distinction between a business and an employee in relation to IR35. The company is the one supplying the services or goods. How the company provides them is at their discretion. But it will want to provide the best it can.

An employee can not send in a substitute. They are the one that is employed to do whatever task they are given. If you are ill, or taking a holiday, as an employee you do not send in someone else to cover for you. Do You. You and only you are the one required.

Even if you do not need a substitute, it is well worth having someone lined up that can substitute for you. Specifying this person could be all it needs. You may not even have to use them. But having the option is vital to staying outside of IR35.

Conclusion

These are my 7 steps to stamping out IR35. What you should learn from all these steps is that you need to present yourself as a company. A company that your client can do business with. I think that implementing everything mentioned above then you should not fall under the IR35 scope.

The 7 steps to staying outside IR35 are:

Have the Mindset of Someone in Business.
Have a Limited Company.
Establish your Terms of Engagement.
Set your Working Practices and Appearances.
Get a Website and Email Addresses.
Provide your Own Equipment.
Have the Right to Substitution.

Each IR35 case should be considered individually. It is still the end client’s decision on whether they see you being inside or outside of IR35. By using the steps above you should be able to convince them that you should be outside of IR35.

Ultimately, if the end client determines you inside IR35 that means that they want you as an employee. They obviously consider you worthy of employing.

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One of the best books on the subject of IR35 is IR35 Defence Strategies: From Contractor to Commissioners by David Smith available from Amazon.

If you are a freelancer within the construction industry worried about IR35 then this, and the previous books recommended, is well worth a read. There still seems to be a lot of confusion regarding the implementation of the IR35 Rules and I hear a lot of end clients are taking a default position of scoping all freelancers within IR35.

Recommended books about IR35 available on Amazon.