How important are working practices to outside IR35 determinations? The short answer is very!
In this episode of the Proudly Off Payroll Podcast, James discusses why IR35 working practices trump contracts – as shown by Kaye Adams’ successful IR35 defence.
Through exploring working practices in this podcast and blog, we shine a light on unfair inside IR35 determinations to help you better understand why they might happen. We also share plenty of practical tips on what you can do to get the IR35 determination you deserve.
Listen to our the latest episode above, search for “Proudly Off Payroll” in your podcast app, or follow these links:
Given how close April 2021 is, it’s surprising just how many people, including clients, agents and contractors, still get in a complete muddle about what is and is not important when it comes to IR35 status.
IR35 HMRC appeal case overturned by working practices
This month, we’ve had a reminder of how IR35 status is determined in practice, thanks to the Kaye Adams IR35 appeal case, which the TV star won against HMRC. This case offers a timely reminder of one of the biggest IR35 myths that still needs busting:
Reality: It’s actually about your working practices and how you operate your business.
- Working practices can sway a determination in your favour, and the Kaye Adams case is a great example of her strong business practices being the deciding factor in being found outside IR35.
- However, they can also go against you. If your contract looks robust and outside IR35, but your actual working practices betray this, then you’re likely to end up inside IR35.
Unfortunately, you can’t pick and choose the best bits from your contract and your working practices. If your contract says you can send a substitute, but in reality your client won’t accept one, then you cannot send a sub. It’s as simple as that.
A clear or clever contract isn’t a guarantee to being outside IR35
A source of frustration for many contractors and consultants is when their contracts say one thing, but they are being determined inside IR35 thanks to CEST inputs that oppose the contract terms.
When it comes to IR35, contracts aren’t sacrosanct. Contracts are an important starting point, however the person making the IR35 determination has to look at the reality of the actual working practices. This goes some way to explaining why so many people now find themselves unexpectedly inside IR35.
Working practices and contracts are a two-way street
What’s really interesting is that this is also a two-way street. Look at the recent Uber case: the contract said drivers were self-employed, but the working practices showed Uber drivers were in fact workers, and therefore entitled to employment benefits and protections.
Many Uber drivers want working practices to trump contracts and to be employed, not self-employed.
On the other hand, many contractors want contracts to trump working practices to remain self-employed or in business.
How on earth do we square this?
Let’s consider the Kaye Adams case again. Parts of her engagement with the BBC suggested she was inside IR35, which formed the basis of HMRC’s challenge. However, her long-standing business practices, well established over two decades, and multiple clients beyond the BBC made it clear to the presiding judge that she was indeed outside IR35.
Key takeaways for consultants and contractors from this case
Understand being in business on your own account
Kaye demonstrated that she truly was in business on her own account, and this was pivotal in being found outside IR35. In order for this to have weight, you truly need to be in business on your own account. Here are a few practical considerations:
- Do you have multiple concurrent clients?
- Do you have employees?
- Do you have a dedicated office?
For many contractors and consultants, the case for this simply isn’t as robust as Kaye’s. Which leads on to another common frustration: end clients aren’t involving contractors in the status determination process.
- How can clients establish the strength of this factor – and overall IR35 status – if they’re not seeking information from the consultant or contractor?
- They can’t. They are making an assumption on your behalf.
- This means that if you have a strong case for being in business on your own account, many IR35 determination status processes will leave you short changed.
Our recommendation here is to gain a solid understanding of being in business on your own account. If you have a strong case, use this – and perhaps cite Kaye’s case – when you challenge your SDS.
Walk-the-IR35-walk with working practices
The second learning from this case is the importance of working practices. You cannot rely on what your contract says alone to guarantee being outside IR35.
Imagine there are two circles that overlap – one is your contract, and one is your actual working practices, as seen through the lens of the person making the determination. IR35 status determination happens in the overlap of these two circles.
The size of the working practices circle is bigger than you think. Too many consultants and contractors focus just on the contract terms and end up being disappointed with the outcome. The good news is that you may have a great deal more influence over your working practices than you think. One of our key messages over the past few weeks has been that of taking responsibility, and that rings true here.
For those of you with a tech background you might know the phrase “if it walks like a duck and it quacks like a duck, then it must be a duck”. Well, if you walk like you’re outside IR35, and you talk like you’re outside IR35, then you’re on the path to being outside IR35. Your mindset, approach and working practices should all clearly point to a B2B/outside IR35 engagement, and you’ll need to ensure you’re living this approach every day.
Take responsibility for your working practices: walk-the-walk, and be overt about the way you run your business.
Here are three practical tips for understanding and leveraging your working practices
Undertake an assessment of your working practices
- Look at your WPs through your own eyes, as you see it. If you’re an inniAccounts client, use our Working Practice Assessment Tool to answer the yes/no questions and it will show your strengths and weaknesses in the 6 key status areas.
- If you’re not an inniAccounts client, you can get an assessment done by companies such as Kingsbridge, Qdos or IR35 Shield.
Now, do the same working practice assessment again through the eyes of your client’s risk averse lawyer, based on what they’ve observed of you.
You now have two assessments:
- how you think your working practices look
- and how your client thinks they look
And you can guarantee that HMRC will be more closely aligned to your client than you.
Now compare them, and look for the gaps
- Where are the big differences?
- What can you do to close the gaps?
Understand who will be undertaking your assessment, and be very overt about the positive behaviours that will close these gaps. For example:
- Make a point of not using internal HR systems to book annual leave
- Remind your client that you can’t be moved onto other projects without a contract amendment
- Pull up your hiring manager when you appear on an org chart without the word ‘contractor’ under your name
Become an IR35 working practices pedant, but obviously without being obstructive.
Life after April
It’s important to remember that this isn’t just about your April 2021 determination – you need to do this for your entire consulting and contracting career.
Why? HMRC & client audits
- You can expect (and we’re seeing) diligent end clients undertaking audits every 6 months to check actual working practices correlate with your IR35 status. The last thing end clients want is HMRC knocking on the door and discovering how contractors actually work is very different from how the client thinks they work.
If you know any teachers, you know the look on their face when they discover Ofsted is visiting. Schools hold ‘Mocksteads’ and practice for this. You should do the same with your working practices.
Cultivate an ongoing risk-averse attitude
If, come April 2021, you find yourself outside IR35, you could argue that HMRC is your client’s problem.
If you end up being inside IR35, it’s the clients liability, so why should you bother? Why should you care?
- If a contractor with a ‘not my problem’ attitude was engaging with a business, they’d be seen as a risk. They risk not only being reassessed inside IR35, but also raising an enquiry from HMRC that spans that entire client’s consultant and contractor workforce.
- If I were that end client I’d terminate them at the earliest opportunity. Things are too busy to deal with loose cannons.
HMRC may be the ultimate responsibility of your end client, but gaining and maintaining outside IR35 status is down to you, and you alone.
Finally, in keeping with the theme of taking responsibility, if you don’t like how your client operates, then don’t waste your energy engaging in tit-for-tat retaliation. Find a better client who understands and assesses IR35 fairly.