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IR35 Advice Centre


IR35 Compliance Guide

IR35 Compliance Guide
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IR35 Guidance


IR35 Compliance for Contractors

Despite changes to the administration of IR35 from April 2021, the way in which it is determined remains the same.

Below we explain the main status tests that need to be considered to assess IR35, how to comply with the legislation and why. (Please note that this is only a brief guide; it is not intended to be a comprehensive analysis of employment status).

If you have any queries regarding IR35 or the below IR35 compliance guide, please do not hesitate to contact our consultancy department on 0116 2690 992 or contracts@qdoscontractor.com


Who is responsible for IR35 compliance?


The party responsible for IR35 compliance depends on when and with who you are contracting. Since 2000 when the legislation was introduced, it was the sole responsibility of the contractor, however, due to IR35 reform in both 2017 and 2021, this is not always the case.

The responsibility for IR35 lies with the contractor if:

  • you are providing services to a client in the private sector which is classed as a small company under the Companies Act 2006

The responsibility for IR35 lies with the end client/fee-payer if:

  • you are providing services to a client in the public sector
  • you are providing services to a client in the private sector which is classed as a medium or large company under the Companies Act 2006 from 6th April 2021

The off-payroll working rules, introduced in the public sector in 2017 and to the private sector in 2021, mean that it is the end client’s responsibility to determine IR35 status. It will also be the fee-payer's responsibility to deduct the relevant tax and National Insurance from source where you are determined as 'inside IR35'. For the private sector, this applies only to medium-large clients.

Every member of the contractual chain inbetween is responsible for ensuring they contribute to the compliance of an engagement by passing the status determination statement along the chain.

Read more about IR35 changes in the private sector.

IR35 Status


The key factors which determine your IR35 status


It is important to note that each working arrangement is reviewed on its own merits and all of the positive and negative elements of both the written contract and working practices will be weighed up in line with case law in order to provide a balanced opinion.​

When considering overall IR35 compliance for the entire engagement, it truly is a mixture of different factors, not simply the written terms. You should ensure that any contract proven to be outside of IR35 also matches the working practices of that engagement. So, if the contract says you are expected to provide your own equipment for the services, you should make sure that you are not using any client equipment during the provision of the services. This is because when determining IR35 status, the working practices are seen to hold more weight or are also referred to as the reality of the engagement.

What are the IR35 tests?

  • Office Holders

  • Right of Substitution/Personal Service

  • Control

  • Mutuality of Obligation (MOO)

  • Financial Risk

  • Right of Dismissal

  • Part and Parcel of the Organisation

  • Exclusive Services

  • Intention of the Two Parties




man adjusting his tie

Seb Maley explains: How to handle an IR35 enquiry

Qdos CEO, Seb Maley, offers a step-by-step overview of the IR35 enquiry process. Can an enquiry be stopped in its tracks?

As of 6th April 2021, all responsibility for determining IR35 status moved from contractors to the end clients and agencies that engage them. Despite this, a level of risk still remains.

Not only is there the small companies exemption that may leave the contractor with the IR35 liability, but there is also the all too real threat of retrospective investigation to contend with. Under normal circumstances HMRC can go back 4 years, which means the period prior to 6th April 2021 is still very much open for them to investigate. At Qdos, we are still regularly picking up new enquiries on behalf of contractors into that historic period.

Contractors shouldn’t be lulled into a false sense of security by the change in rules that reform presented. With that in mind, here is an overview of the enquiry process including guidance on how best to proceed if you are unlucky enough to find yourself under investigation.


How an enquiry begins: An initial letter

An enquiry will almost always open with a letter from HMRC, so it’s always important to be alert to any correspondence you receive. Typically, an opening letter refers to a check of employer records. Sometimes HMRC use a routine process in order to get their foot through the door. They then to move on to questions related to IR35 status. In other instances, the opening letter is more direct which may be down to some other form of intelligence received.

HMRC’s motive of looking into IR35 is nonetheless usually fairly clear from the content of the letter.

It’s likely that the opening letter will also contain some questions and requests for information. HMRC like to get a hold of things like contracts, schedules, and invoices from an early stage. They are also likely to want a high level description of how you work and what you do.


How to respond: Submitting an initial response

At this stage, our advice to contractors is that you seek the assistance of a professional. A response drafted in the wrong way or containing the wrong details may be used against you further down the line.

Those contractors that have relevant insurance policies in place should at this stage report to their insurance provider. For those contractors who do not have adequate insurance in place, it’s time to try and find a company with practical experience in dealing with status cases, as soon as possible.

The assistance of your insurance provider or an experienced professional will be vital when it comes to submitting an initial response.


What next? HMRC’s response

Once the initial response is submitted, HMRC will then come back with more questions. However, it could be several weeks between letters. An enquiry can take months or years to run its course.

When you do get HMRC’s response, it’s likely that they will want a lot more information. It’s common at this stage for them to send a very long and detailed list of questions for you to answer, covering every aspect of how you run your company and how your services are provided.

Ensure this is approached with a huge amount of care. A large part of IR35 is about terminology and semantics, questions asked are likely to be leading. Again, this type of questioning is best handled by an expert who knows how the facts should be presented.

Either in this letter, or in subsequent correspondence, HMRC may well request a face to face meeting with you. You are under no obligation to do this and we suggest that all questions are better dealt with in writing, this way you can be sure that you are responding clearly and accurately.


Making contact with the client

Once all information requested by HMRC has been provided, if it is still not accepted at this stage that you are outside IR35, it’s likely that HMRC will want to speak to your client for the applicable engagement.

This can be considered a dangerous time for any IR35 investigation. The risk here is that HMRC end up speaking to someone who does not understand IR35 or does not have any direct experience of how contractors work.

The possibility of this should be prepared for. The professional in charge of your case should get in touch with the client ahead of any contact from HMRC, ensuring that any responses are coordinated and reflective of the actual facts.


HMRC’s final position and your response

After some potentially lengthy back and forth, HMRC will state their final position.

If they agree that you are outside IR35 then you can consider it a job well done.

If they reiterate that you are, or were, operating inside IR35, then HMRC will raise what is called an assessment. An assessment will detail the tax and national insurance they believe is due.

This can amount to a significant sum. If you no longer wish to take the case any further, you can accept HMRC’s decision and try to negotiate a settlement amount at this point. On the other hand, you have 30 days to appeal the decision. This will take the case out of HMRC’s hands and to an independent tax tribunal.


Taking it to independent tax tribunal

Qdos have seen a lot of cases follow this route over the last few years. Taking a case to independent tax tribunal means that an impartial judge will review the entire case and decide whether HMRC have made the right decision about your status. To do this they will dig out decades worth of case law and compare the facts of your case against precedents that have been set in the past.

It may come as no big surprise that this is another lengthy process. There will be a long wait for your case to be heard, followed up by another wait for the judgement to be delivered. It can often be several years between the opening letter and a tribunal result.

In a lot of recent cases the tax tribunal judge has rejected HMRC’s position and agreed that the contractor is genuinely outside IR35. However, given the complexities and long history of status, it’s always a bit of an unknown factor.

If the judge agrees with HMRC, however, there are several more stages of appeal. At this point the legal costs for representation will also become a consideration.


Where applicable, how might an enquiry be cut short?

With the help of expert representation from the start, most cases are closed down long before you get to tribunal. HMRC often choose to pick their battles.

Our advice to contractors is to be prepared. Even if the chances of an investigation are relatively low, it’s a good idea to have insurance or representation lined up and to collate as much evidence as you can to reinforce your position.

With Qdos’ Tax Liability Cover, you have expert representation from day one of an enquiry, in addition to financial protection should HMRC find that your contract belonged inside the IR35 legislation. For further information, get in contact with a member of our team.

By:Qdos Contractor

IR35 Guidance


How to comply with the IR35 legislation

When it comes to complying with the IR35 legislation, you should consider the following steps:

  1. Review each engagement for IR35 status. This includes assessing both the written terms but also your working practices (the reality of the engagement) against the key factors above.
  2. Check that your working practices mirror what is detailed within your contract. The reality of the engagement holds more weight than the written terms so it is important to ensure your contract is a true reflection of the engagement.
  3. Keep a record of your due diligence. This could include copies of third-party contract reviews, a Confirmation of Arrangements and/or relevant correspondence which may help evidence your position.
  4. Ensure the relevant tax and national insurance is paid for your status. Being compliant with IR35 is often confused with being 'outside IR35', but compliance really just means paying the correct tax for your employment status. So if you are operating 'inside IR35' for an engagement, then a deemed payment must be made.
  5. Maintain up-to-date assessments of your engagements - ensuring reassessments throughout the engagement or if there are any material changes
  6. Keep an eye on relevant news for any changes or updates to how status is determined

Since April 2021, whilst it might no longer always be the contractor’s responsibility to determine their IR35 status, contractors should still be focusing on ensuring compliance within their engagements.

It is important to remember that the reform does not apply to any engagements with companies classed as small as per the Companies Act 2006 and contractors are still liable for any services provided prior to April 2021. See above for more information on who is responsible for IR35 compliance.



IR35 compliant contracts


An IR35 enquiry from HMRC will always begin with a request for copies of your written contracts relating to the accounting period in question, with proof of why you consider it to be outside of IR35. A robust contract may stop a full-blown investigation in its tracks, so it is essential to ensure compliance in this respect. A variety of status tests, outlined in this guide, are used to assess your contract, with no single test putting you inside or outside the legislation. Both the contract and working practices will require assessment as a whole using all of the status tests to determine your employment status.

​The contract does not need to be in writing - an oral or implied contract is legally binding if the parties intend it. The terms of the contract can be collected from the circumstances surrounding the engagement.

​It is not only your contract with a recruitment agency which may be assessed; in Usetech Ltd v Young the High Court decision made it clear that the "upper level" contract between the agency and the end client was to be considered in deciding the status of the worker, notwithstanding the terms of the agency's contract with the worker's Personal Service Company. Most contractors, however, will never see the upper level contract or have any rights to.

​HMRC will look to see if you have taken ‘reasonable steps’ to ascertain your status and so it is imperative to have each contract reviewed in order to display this. View our contract review services here.

Having your contract reviewed by an independent third-party expert, will give you a better idea of where your engagement sits in regard to IR35 status. While such a review gives you the IR35 status of that contract, however, in order to find out the overall IR35 status of the engagement you will also need to undertake a review of the working practices of that engagement.

Working Practices


The working practices of an engagement is how those services are provided in reality.

The written contract between the contractor and the end client could be perfect in terms of IR35, demonstrating key areas such as substitution, control, non-exclusivity and mutuality of obligation but this will also need to be proven in practice. Although the written contract remains important in determining status, should you be unfortunate enough to be subject to an IR35 enquiry, HMRC will look closely into your working relationship with your client.

​In an ideal world, we would like an IR35 friendly contract mirrored by the working relationship with the client.

If you are subject to a status enquiry by HM Revenue & Customs, the Status Inspector will normally want to obtain information from both you and the end client about the practical working arrangements of each engagement. This is known as constructing the "hypothetical contract" between the worker and the client. It is vital therefore that there is a clear understanding between you and the client about the nature of your day-to-day working relationship. This will also apply to situations where there is no written contract.

​We offer services for assessing your working practices, including a Working Practices Assessment and a free Confirmation of Arrangements document which can both be assessed by our consultancy team.


Why is IR35 compliance important?


Non-compliance with IR35 could leave you with not only the weighty cost of defending yourself against an enquiry from HMRC but also the potential burden of being saddled with the cost of any unpaid taxes should you be caught by the legislation.

Anyone can be investigated by HMRC, and should you be found to be inside IR35 but have paid tax as an outside IR35 contractor, you will be required to pay back the tax, interest and potential penalties as a result.

You should also bear in mind that an enquiry from HMRC is by no means a walk in the park, not only can these proceedings be extremely stress-inducing but they also have the potential to go on for a long time. The cost of defending yourself from an IR35 enquiry can very swiftly mount up if you don't have an insurance policy.

For services provided under the off-payroll working rules (i.e. in the public sector since 6th April 2017, or to a medium-large private sector business since 6th April 2021), you will not hold any liability as the contractor and it will be your client of fee-payer who will be subject to such an investigation in relation to these services.



Top 10 Tips for IR35 compliance


1. Have your engagements assessed for their IR35 status, by doing so you can evidence compliance with the legislation should your engagements ever come into question from HMRC. By opting for a mixed approach of both a contract and working practices review, you will have a clear picture of the reality of your engagement in terms of IR35 status.

2. Educate yourself about what IR35 might mean for your engagements and keep up to date with the legislation. By using the wealth of online articles available to you, you stand a better chance of ensuring compliance in the way you provide your services by simply knowing what could be classed as inside or outside of IR35.

3. Ensure communication within your contractual chain. By doing so, each party will know what they are accountable for. By keeping track of each other and the determination process it will be easier to make any necessary changes to better IR35 status.

4. Take care when checking that your working practices accurately reflect the written contract you have signed. Not only should you be actively monitoring the way you provide the services to ensure you are acting in a way that is compliant with the terms of your contract, but you should also be collecting evidence to prove this is the case.

5. Make sure you are providing services in a manner that is consistent with working outside of IR35 or pay the relevant taxes if not.

6. Collect evidence to show you are treated differently to your client’s employees. Examples of this would be a record of any relevant emails or other forms of contact with your client.

7. Look for contracts that are outside of IR35 at their very base level, in other words, project-based contracts rather than time-based contracts. Always have a good read of the contract before signing. Another example of this is that you should look to see that you are not individually named within the contract and are only referred to as a business.

8. Seek to attain a Confirmation of Arrangements. Having a CoA signed by your end client greatly increases your chances of successfully defending yourself from an IR35 enquiry. For more information on what a CoA is and how to attain one, see here.

9. Show you operate a genuine business and that you are not part in parcel of your end client’s company. Examples of this would be investing in stationery for your business, such as letterhead paper, or simply wearing an ID badge when attending your client’s site.

10. Have proof that you have taken financial risk on behalf of your business. Examples of financial risk would be holding relevant business insurances such as Professional Indemnity Insurance or Public Liability Insurance. Both of which we can provide for you here at Qdos.


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