Alan Parry, a Sky Sports analyst, lost his IR35 appeal against HM Revenue & Customs over a £356,000 tax liability earlier this month. The 74-year-old football broadcaster disputed an HMRC assertion that the contract he maintained with BskyB for five years until April 2019 constituted an employment connection rather than self-employment.
Suppose a contractor is considered a “disguised employee” for tax reasons and is not self-employed. In that case, they must pay PAYE and national insurance payments under the IR35 regulations, a collection of tax laws regulating off-payroll freelancers.
According to Parry’s attorney Chris Leslie, the restrictive wording of Parry’s contract, which gave BskyB more authority than it required, was the key factor in HMRC’s IR35 victory.
>See also: Freelancers could avoid tax because of IR35 loophole
Dave Chaplin, CEO of the tax compliance company IR35 Shield, commented on the situation and told the Financial Times that employers and contractors should be mindful that “the contract is king.”
Impact of the Alan Parry case on independent contractors
Freelancers will undoubtedly find it unpleasant to hear about HMRC’s victory against Alan Parry. The intention of HMRC to promote tax equity and its application of the off-payroll regulations are once again brought into stark relief. Although a fair tax system is desirable, navigating the rules may be challenging.
Suppose there is one lesson to be learned. In that case, you must manage your status determination of whether you are within or outside of IR35 to remove any potential for ambiguity in the contract. According to Chris Leslie, the attorney who defended Parry, there was ambiguity in Parry’s contract that gave Sky “more control than was needed or wanted.”
>See also: HMRC lays down IR35 compliance principles ahead of the new tax year
The most important lesson from this should be the term “control.” Take responsibility for creating a contract that reflects this so that you may be sure you are the controlling party, not the hirer. As the Parry case demonstrates, standard firm contracts won’t function when it comes to IR35.
Instead, they must describe the task you will accomplish, how you will do it (for example, using your tools and during your working hours), and that you have the authority to replace another expert with yourself.
Lorraine Kelly successfully claimed when she demonstrated that she had a key role in choosing who covered for her while she was on vacation, substitution clauses are a useful tool for demonstrating that you are doing business rather than acting as a quasi-employee.
Here are some more steps you may take to be sure you follow the law:
Realize that working off-payroll puts a customer in danger.
They want and need to do it correctly since doing it incorrectly might result in a tax charge. It’s true that some businesses outright prohibited contractors when off-payroll initially entered the private sector because they were worried about making incorrect judgments. Since the effect of not having access to flexible contingent labor reached home, the world has advanced.
Despite some widespread usage of inside IR35 contracts to reduce risk, they are beginning to stand out.
In general, hiring contractors and freelancers has been beneficial since it expands employment possibilities and increases the likelihood that a business would be willing to discuss the arrangement and develop a contract that isn’t subject to IR35. But to achieve this, you must be knowledgeable and familiar with the complexities of the law.
Prioritize the following three details:
Mutual responsibility
Statements of work are used by parties that execute contracts correctly to specify precisely what they will perform and when. This also passes another HMRC requirement known as “mutuality of obligation” (MoO), which requires you to demonstrate that you are not treated like an employee and paid just for being available to your customer but are paid to do a specified task.
Understanding how MoO determines a status will put you in a position to bargain confidently. Evidence suggests that the more knowledgeable you are, the more likely you will get an outside status decision that will hold with HMRC.
Many independent contractors find it advantageous to analyze all the laws beforehand so they may modify their working method and forge a tight seal with a customer.
Recognize the advantages of running a company on your own.
Kaye Adams needed to show that she was operating her firm on her account in the well-known Kaye Adams case to be declared outside of IR35. Having numerous continuous customers, a dedicated office and even workers can help you demonstrate this.
Prove that you are not an integral component of the organization.
Compliance requires effective working procedures. You will be regarded as an employee if you act like one, which gives HMRC more excuses.
Quick wins to stay out of IR35
Quick wins to avoid scrutiny are:
- Develop a brand, and have a dedicated website and social media presence
- Trademark your company name
- Invest in your own phone, computing equipment, printer etc
- Invest in yourself through training and memberships to professional bodies
- Ensure you have things like professional indemnity and liability insurance.
Things to avoid to stay out of IR35
For all the do’s there are also a lot of do nots. Here are just a few of the things that can get you into hot water:
- Going to company training and social events
- Getting involved in appraisals or any HR matters
- Accepting performance bonuses open to employees, or take advantage of things like gym memberships
- Being misrepresented as an employee – make sure it’s clear you are a contractor or associate on your ID badge, email address and org charts
- Taking on new work before you have adjusted the terms of the existing contract
- Taking days off with permission – you should inform your client you’re not available
- Working the same working pattern as staff
These things combined with knowledge and understanding, and following good practices and behaviours, will stand you in good stead when it comes to running an IR35 status assessment with a client. The way you conduct business and engage with them should be clear and correlate to an outside determination.
James Poyser is CEO of inniAccounts and founder of OffPayroll.org.uk
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