In this post, we will explore 3 key working practices that will help you build an impenetrable IR35 defence.
However, before we begin we’d like you to imagine this doomsday scenario.
Imagine it’s 10 on a Monday morning.
You (the client manager) and your contractor have signed into the First-Tier Tax Tribunal in London.
An hour later your contractor is standing in the witness box facing your nemesis – a seasoned barrister representing the Taxman who is looking to prove that, in that contractor, you’ve hired a disguised employee.
The dialogue goes as follows…
The IR35 tax trial
HMRC barrister: So, you had a substitution clause in your contract?
Your contractor: Yes.
HMRC barrister: You never exercised the clause, did you?
Your contractor: No.
HMRC barrister: But, you say you could, in theory. Don’t you?
Your contractor: Yes.
HMRC barrister: Would your client accept a substitute?
Your contractor: Yes.
HMRC barrister: Did he ever tell you that?
Your contractor: No, we never talked about it. We just knew there was a right in the contract.
HMRC barrister: Tell me the steps you would take to exercise the right.
Your contractor: I would inform my manager, introduce the substitute, and then ask my substitute to report to the office instead of me.
HMRC barrister: Your manager appointed you after an interview in which you passed and others didn’t. Why would he simply accept a substitute you present without screening him?
Your contractor: Because we have a clause in our contract.
HMRC barrister: Are you aware of any policy your client has that allows them to waive interviews, on the basis that a contractor has a clause to replace themselves?
Your contractor: No.
HMRC barrister: Would your substitute need access to the client’s IT environment to perform his obligations?
Your contractor: Yes.
HMRC barrister: Are you allowed to simply share your login details and your laptop with them in the intervening period?
Your contractor: No.
Building an IR35 defence
By now, we hope you get the point. A great contract is an invaluable asset for an IR35 defence.
However, IR35 defensibility does not rise to the level of the contract, it falls to the level of the actual working practices.
And there lies the biggest hole in your IR35 defence – and probably the biggest reason why IR35 cases linger on for years without the taxman caving in.
With this in mind, we will cover a few key working practices that when coupled with a safe contract and great IR35 insurance, will make your IR35 defence virtually impenetrable.
This blog summarises the key points from a guest blog post we wrote for Kingsbridge Contractor Insurance: How to build an impenetrable IR35 defence.
3 working practices to build an IR35 defence
Here are 3 key working practices you can use to build an impenetrable IR35 defence.
1) Substitution
Whilst most clients do not hesitate to offer contractors a right to substitute, in reality, the arrangement can be a bit like this.
Courts would expect an end client to have a proper process in place, so they know what to do in the event of a substitution.
Of course, if contractors exercise their substitution right in hordes, it could prove an operational and logistical nightmare for the clients. But, here’s the best bit of advice from our experience.
Your receptiveness to substitution has little bearing on the number of substitutes who will walk through your office doors.
Substitution remains a rare phenomenon because it costs money and time to the contractor who chooses to exercise that right.
2) Statement of Work (SoW)
One of the most popular IR35 defence tactics employed by end clients and intermediaries is the Statement of Work, or SoW.
Theoretically, at least, if there is a SoW at the point of agreeing to a contract, the “scope of services” guides their work – i.e. the client isn’t the one directly supervising, controlling or directing the work.
Many recruitment agencies have repurposed themselves to be Managed Service Providers (MSPs), signing up to all sorts of technical statements of work, but usually with little competency to discern what is written in those statements.
I wonder how much a recruitment business posing as a technical consultancy whilst lacking the technical skills and not assuming a typical consultancy’s risk, is different to an offshore umbrella company posing as a lender without wanting to be paid back.
You can find out more about the Statement of Work and IR35 in our blog: 5 Things You Probably Didn’t Know About IR35 (That You Probably Should).
3) Client control
Client control is one of the most important IR35 tests.
To be on the right side of IR35, contractors should be managing their own day. As long as they’re meeting project objectives on time, it’s entirely up to them how they do so.
Here’s where a credible intermediary comes into play. An intermediary that focuses on specific types of work, and has some capacity to understand the technology in play can truly stand in as a Managed Service Provider.
A commercially savvy intermediary will also help deploy fit-for-purpose working practices to support substitution. This means you can stand and talk at length in that witness box of the things you did to make substitutions happen.
What’s next?
To build that impenetrable IR35 defence, you need a great contract and sound working practices – ideally backed by a top-notch insurer indemnity.
This can feel like a lot!
Acting as a one-stop-shop, a credible intermediary will employ a range of all such measures, and more, to make sure you get to the right side of IR35 and stay there.
Get in touch, to see how we can help you today.
