IR35 April 2020 – Ensure that your Ltd company is genuine
In April 2020, IR35 regulations will probably apply to the private sector. If you operate as a Software Professional though your own Limited company, you need to get certain things in place before then if you want to stand any chance of being outside of IR35.
If you are looking for a way to get around IR35 then this article is not aimed at you.
This article is aimed at Company Directors who want to help prove that they are running a genuine UK based Limited company supplying software services.
At the time of writing this article there is a slim chance that the regulations could be cancelled. It would be great if I could delete this article in a few months and celebrate the death of the ill thought out regulations.
Meanwhile, you must be prepared for the worst. You will not escape IR35 by shrugging things off saying "I am a Contractor with a Limited company thus I am outside of IR35".
This article is not about the rights or wrongs of IR35. It is not about the several options available to Contractors. This article is aimed at Contractors who have done their research, consulted with their accountant and an IR35 specialist and have decided that they want to keep operating through their Limited company.
If you are not up to date on IR35 here are a few links at the end of this article.
This article is aimed at Professional Software Contractors such as Software Developers, Business Analysts, Testers etc, who want to keep operating through their Limited company with the minimum possibility of being caught by IR35. You need to start implementing the points in the list now so that you are ready well in advance of April 2020. Whatever you do, it is important to have a different contract in place before April 2020. Do not simply renew your existing contract beyond that date. Do not start a new contract after that date with a contract that is similar to what you have previously used.
Also, you need to consider that any payment you receive after April 6 2020 will be subject to the new regulations, regardless of when you did the work.
Firstly, I don't want to waste your time. This article is for people who want to solidly defend that their Limited company is legitimate and will take their case to court in an attempt to be judged to be outside of IR35. If that is not you then this article is not for you. Do not do things to try and avoid IR35. You are either setting up a genuine business or you are not.
Secondly, I have no legal or accountancy capacity. You will need to work with your Accountant and an IR35 consultant to determine your working status. (However, under the new rules it will be your end client or Recruitment Agent that has to determine your status!!! It's true, I'm not joking.)
Thirdly, nothing will stop HMRC taking you to court. This article is all about being prepared for that event.
You are not interested in shady deals, schemes or arrangements. You are not interested in working in contracts that try and make you appear to be outside of IR35. Remember, it is a fallacy to think that a carefully worded contract will place you outside of IR35. You are serious at running a genuine Software Services Ltd company.
This is not a "tax arrangement" or avoidance or a scheme. It is simply about running a perfectly legal limited company.
Unfortunately, the new rules and regulations are loose and open to interpretation, so it impossible to say, 'do this and 'don't do that' and you will be outside of IR35.
Here's your strategy.
· Assume that whatever you do, the HMRC will take you to court. They will do this because you are a one-person business, own all the shares and are the only Director. To the HMRC you are known as a Personal Services Company (PSC).
· You will have IR35 insurance in place.
· When they take you to court, you will now attempt to prove to a judge that you run a legitimate Limited company.
In this article I have presented a checklist of things that you should be doing or not doing. I expect that you know most of them. Hopefully the list serves as a reminder about the things that you should be doing and documenting. There is nothing special about the list. it simply contains things that the majority of normal Limited companies implement on a day to day basis.
Ultimately, if the HMRC accuse you of being a disguised employee then it will be a Judge that decides your status based on all the facts that you and others present.
Some Contractors will say the checklist is to much for them to implement. Well, HMRC is being harsh and you will need to put up a fight if you want to avoid an income reduction and possible investigation into past contracts.
Some people will say that some items in the list are trivial and won't mean much. I say that you need as many items ticked as possible to stand a chance of being outside of IR35. Try to get into the mind of a Judge and what they would think if a Barrister for the HMRC said, “This so called IT Consultant does not even have a dedicated company phone number, further more they do not have a web site, can they honestly be considered to be a normal company?”
A lot of Contractors I know will not be interested in being this diligent in running a company. I guess they will be happy to be classed as being inside IR35 or working via an umbrella company. But that's not you. You are extremely anti IR35 and you operate a legitimate company.
If you are not interested in running a fully valid company, then this article and checklist is not aimed at you.
Due to the way that HMRC are picking on people and the large number of failed court cases that they have you can discount their opinion. It all comes down to being in court and proving to a Judge that you are operate a genuine Limited company.
You should aim to tick and actually implement as many of the items in the list as possible so that if you end up in court you have a good chance of winning. You'll turn up at court with total confidence. Reeling off the list of many things that make you a fully-fledged company.
Here's the list, how many can you tick? Be realistic, the HMRC and a court will probe everything. What is the proof that you are actually doing an item that you tick? Keep evidence that you can produce at a court case.
Let me stress this. You need to implement and document each item, no trickery, no schemes no fake contract clauses.
Where I say, "My company", that refers to the Limited company that you run.
I have loosely categorised each item under terms that are often mentioned in IR35. This may help you with your research.
If you can tick a large percentage of the above, welcome to the new world. Actually, it's not a new world, it is what help defines a company. It would be hard for a court to say that you are a disguised employee, providing that you have proof that it is the way you operate. Permanent and disguised employees will probably not tick any of the items in the list.
Notice that a lot of the points say, 'My Company', IE: it's not all about you.
If you have only ticked a few of the above, then your chances of winning a court case are greatly reduced and I expect that you will be dreading a letter from the HMRC.
Some items in the list might carry more weight than others. In the future I might add weighting as things become clearer. But you operate a legitimate company so you should be implementing most of the items.
Even if you have ticked every item, the Inland Revenue will probably still regard you as a Personal Services Company (PSC). The HMRC do not look favourably upon PSCs and you will still be a target.
If you have implemented and put into practice most of these items and you get a letter from HMRC you will be ready to fight, you might even enjoy it! If you do get a letter, simple respond to it with an acknowledgement that it has been received and is being dealt with by your advisers. (You have got IR35 Insurance, haven't you? If not, drop everything now and get it in place.)
You have got to operate a real business. There is no point ticking these boxes and thinking that you can fake it. Reality must reflect exactly what you have ticked. You must document everything that to do with the running of your company.
You will notice that I have not included "Right of Substitution" in the list. This is because your clients will be engaging with your Limited company to do the work. They are not engaging with you personally. However, the ‘How you work” section does has an item that says the work will be done by any suitably qualified person in your company.
When you go to a restaurant, they don't say today you'll be served by Joe but we have the right to substitute.
When you take your car for a service they don't say, your car will be serviced by Diane today, but we want you to give us the right to replace her.
However, because you need IR35 Insurance, I expect that the insurance company will insist on a right of substitution clause. That’s why in the ‘How you work” section I have included an item that says the work will be done by any suitably qualified person in your company. Don’t forget, you must actually implement the items that you tick.
You must get into the mindset and reality that you are running and operating a company. You are not a person who goes into an office, sits with permanent staff and gets paid weekly or monthly. If you want to be near bullet proof, then you must move away from that old way of working. (It was nice, but those days and working practices are about to disappear.)
It's a sad fact that even if you tick all the boxes and it is clear to everyone that you are operating a genuine business that the HMRC will still take you to court. It is vital that you have IR35 insurance.
I know that individually many of the points alone will not prove that you are running a genuine business. But it's all about the total points. Take for instant the company phone. It alone does not prove that you are a business. But you will use that phone for discussions with your clients. You will keep records that you can show in court if required.
Running a genuine Software services company with documented proof means that you are ready for HMRC to pick on you, for them to ignore the facts, ignore reality, ignore proof and take you to court. You need originals or copies of all your documents. If you claim to have Limited Liability Insurance can you produce the document right now? If I went to your website, called your phone number, would you answer it in the manner of a business?
If you register at UK Software Jobs, ( https://www.uksoftwarejobs.co.uk/serviceprovider ) you can add your company profile and we will match you with forward looking end clients that are prepared to move away from the ‘old’ way of having Contractors on site and instead work with external companies like yours.
We are working with many clients who are advanced enough in their IR35 assessments to understand that if you implement many of the items in the list then they will classify you as being outside IR35. These companies will be placing 'Statement of Work' projects with us that you can tender for.
Just to remind you, I have no legal or accountancy capacity. You will need to work with your Accountant and an IR35 specialist to determine your working status as it might be viewed by a court. You will also need to work with your end clients to provide them with enough information so that they issue a 'Status Determination Statement' that shows that the contract is outside of IR35.
If you are not up to date on IR35 regulation planned for April 2020, here are a few articles to give you more details.
Photo by Austin Distel on Unsplash