In the event of an IR35 investigation, many contractors find themselves without any paperwork to support their daily working practices. HMRC will look for proof that the contractor is subject to direction and control, or that they’re part and parcel of the client company. Typically, contractors generate compelling evidence about their IR35 status on a daily basis, but they might forget to document this. By adopting an ‘evidence gathering’ mindset you’ll find that collecting emails, meeting notes, invoices; making diary notes and updating timesheets becomes common practice. Collecting and filing this means that it’s readily available and can quickly bring IR35 investigations to a halt. Here are some situations that can provide key pieces of evidence.
Negotiating your contract
Your contract will be the first piece of paperwork that the taxman looks at in an investigation, so it’s important to make it as watertight as possible. The main point is that the contract should be “for services” and not “of service.” A contract for services clearly outlines the limits of the engagement, such as the specific services you are providing, the estimated length of the contract and the agreed cost. Include a substitution clause, suggesting that if you are unable to do the work, you are able to suggest someone else to take your place. In certain situations you could consider putting some of these terms into practice, such as keeping an active database of possible substitutes or using one for part of the contract. Subject to the approximate dates, you could also terminate the contract a week early if you’ve completed the assignment. You should also check that the lower and upper level contracts mirror each other. If there are any areas not covered by the contract, consider asking the client to sign a confirmation of arrangements letter.
You’re sent home when there’s a problem
Contractors are only paid for the work that they do. This means that when there’s no work, or when there’s a problem with operations, contractors can be sent home without payment. This was a clear indicator in the Marlen case, where contractors were sent home when the company’s IT systems went down. This also demonstrates there’s no mutuality of obligation between the client and the contractor. If you’re sent home then make sure you file the notification email. If a poster goes up on a notice board sending you home, take a photo of it. Your timesheet is also further evidence that you’ve only been paid for the hours you worked.
Taking time off by informing, not asking, your client
Although contractors should inform their client when they take time off out of courtesy, they’re under no obligation to ask for their permission. As long as the work specified in the contract is completed, contractors are in control of their schedule, including how and when they complete the work. Avoid using your client’s holiday forms or HR systems to notify them of your time off. Instead, send an email from your limited company domain and make sure you file a copy. Again, your timesheet should reflect the fact that you didn’t receive holiday pay, or sick pay if this is the reason for the absence.
When you have to rectify defective work in your own time
There may be occasions when the client isn’t satisfied with an aspect of the work and wants you to rectify this. In this situation, contractors are obliged to rectify work in their own time and at no extra charge, meaning that they effectively bear the additional cost. This demonstrates financial risk on their part. If a client expresses dissatisfaction with any aspect of your work, ask them to notify you in writing, specifying exactly what needs rectifying and why. When the changes have been made, ask the client to confirm this.
Tendering for contracts and speculative work
Tendering clearly demonstrates that you are in business on your own account and is evidence that you are taking financial risk. Even if you’re unsuccessful, keeping copies of presentations, letters and emails, tender applications, diary notes, names of prospects and clients who you met with can provide you with valuable evidence. Similarly, if you deliver any speculative work or give a free consultation, emails and documents that relate to this are worth keeping. Speculative work featured in the Primary Path tribunal, where it was cited as compelling evidence that the contractor was in business on their own account.
Acting like a company
Having your own website can strongly point to you being in business on your own account, as employees would have no need for this kind of marketing. Make it clear that the website is a business website, rather than a personal one. If you are clearly advertising yourself as a business, this is a strong indication that you are operating as one. To further emphasis this point, contractors should avoid using their names as the business and sending emails from a personal address. By creating a brand that you can put on your website, business cards, and public profiles you’ll strengthen your case as a business. Publishing a website was an important part of the ECR Consulting case in combination with monitoring sites for work opportunities.
Working for a variety of clients
Although this may not always be possible, working for a variety of clients, and more than one client at a time, is a strong indication that you’re not employed by any specific organisation. Keeping chronological records of all your contracts will help you to quickly demonstrate that you regularly worked for multiple clients.
Using a home office & your own equipment
Flexible working practices mean that working from home isn’t evidence of being independent in itself. However, if the amount of time you can work from your home office is over 20%, then this is a very strong pointer towards the client having no control over where you deliver your services. Phone bills and receipts for your equipment plus any servicing it requires are also useful. If you generate significant running costs and claim tax relief on your home office you can also use this as evidence, although proceed with caution as this can also ‘trigger’ a tax investigation by HMRC. You should also pay for your own travel and keep any petrol receipts and transport tickets.
Keep the client at arm’s length
In order to avoid being seen as part and parcel of the client company, you should keep the client at arm’s length. Although there are certain things you can easily control, such as not using the staff canteen or working at a designated desk, other things might require you to work with your client to ensure your independence is corroborated. If possible, ensure that you’re referenced as a contractor on any paperwork and that you don’t appear on any lists of employees.
Refusing to carry out additional work
Within reason, contractors aren’t obliged to carry out any work that isn’t specified by the contract. There are times when you might want to go the extra mile in order to make a good impression. However, you should be wary of taking on any significant task that’s outside of your original agreement. This could have a financial impact for a genuine contractor. Similarly, if the client asks you to renew your contract you’re under no obligation to do so. By declining to do work outside of your contract you’re sending a strong message that there’s no mutuality of obligation between you and the client.
By gathering together this paperwork you’ll have compelling evidence to present in the case of an investigation that could evidence your working practices over many years. This will give you the best chance of defending yourself and in many cases, key pieces of evidence can bring the proceedings to a halt. For step by step information on what to do in an IR35 investigation, read our guide here.