As a freelance contractor or consultant you must understand your supply contract and the legal implications that you are agreeing to.
You need to understand your circumstances and assess whether your assignment will be caught within IR35.
If you have your contract independently assessed you are far less likely to be pursued by HMRC to justify whether your contract is outside of IR35 or not. This is a free service provided by our associates S&S when you decide to place your contract through BITE Consulting Group Ltd.
Do you understand the legalities of your contract? Is your rate competitive? Do you need advice on your contract status? What is your notice period and what is your liability? What insurance do you need? Are you sure your not operating as an MSC? Very importantly is your client credit worthy do you want us to check them out?
Are you going to build up a tax liability?
At BITE Consulting we offer
Initial Free Advice on the commitments you are making in your contract. We will review this against the benefits of permanent v contract work and employment v freelance status. We will recommend what we feel is the best way forward for your needs and then offer an opportunity for one or more independent professionally qualified sources of advice for a second opinion. We can offer a number of services such as our serviced office facilities and “buddy system” which can help earn you valuable points against the Hmrc business entity tests and help secure your net income.
Practical Contract Advice on your contract or proposed contract is provided free as part of the Contract Job Search service.
The Inland Revenue will review the actual working practices adopted together with the legal form of each contract. Each IT engagement will need reviewing on a case by case basis, taking into account a number of different factors. The legislation will test the nature of each engagement and judge it to be one of employment or self-employment (freelance and outside IR35).
HMRC Business Entity tests (2012) have been introduced to give their inspectors guidelines to assess contractors circumstances and whether to investigate. This is a points based system and contractors need to achieve 20+points to be low risk an unlikely to be subject to investigation.
Factors determining points:
1. Business premises- do you rent own a business premises / serviced office :10 points
2.Professional Indemnity Insurance (PII) – do you purchase it: 2 points
3. Efficiency- have you in the past received full payment for work completed ahead of schedule: 2 points
4.Assistance- does your business use employ engage any worker to assist in 25% of more of its turnover: 35 points
5.Advertising -Have you spent £1,200 or more on advertising : 2 points
6. Previous PAYE- were you previously PAYE: deduct 15 points
7. Business plan and business bank account- Have you produced one: 1 point
8.Repair at own expense- do you put right errors you make without billing: 4 points
9.Client risk- have you been unable to recover money from the client covering 10% turnover :10 points
10.Billing Invoice- do you invoice before being paid: 2 points
11.Substitution are you able to nominate a substitute to perform your duties is this substitution clause in your contract: 2 points
12.Actual substitution-Have you actual made a substitution: 20 points
Low risk 20 +points, Medium risk 10-20 points ,High risk less than 10 points
There is little doubt if you genuinely meet theses tests with 20+ points you are unlikely to be investigated unless you fail to make statutory returns or highlight your business in other ways for investigation. BITE can help you understand how you can genuinely represent yourself as outside IR35 and gain more than 20 points through using its contractor services.
IR35 case law
Dragonfly – The latest 2008 case law has revealed that to be sure your contracts are outside of IR35 you need to have site of the client contract. If the substitute clause is “qualified” then your contract may not be outside of IR35.
Key factors in a contract review are likely to be
- The right to exercise control – Is the contract assignment subject to ongoing client supervision and management? Can someone tell you what to do or how to do it?
- The right to get a substitute or helper to execute the work – Are you free to hire someone else to do the job or does the client specifically require your services?
- The provision of equipment – Are you obliged to provide items of equipment essential for the execution of the assignment? (A worker provided with office space and computer equipment by the client may be considered employed)
- Financial risk – Does the execution of a particular assignment expose the contractor to any financial/commercial risk? E.g. fixed price contracts; buying assets in the business and bearing associated running costs; expenditure on training to gain a skill.
- The basis of payment – Employees tend to be paid a fixed wage or salary. Is the contractor paid by the hour/week/month or paid overtime? (i.e. Time and Materials) or is a fixed sum paid on the completion of an agreed deliverable?
- The opportunity to profit from sound management – A person whose profit or loss depends on his capacity to reduce overheads and organise work effectively may well be self-employed.
- Part and parcel of the organisation? – are you an integral member of the client’s staff?
- The right of dismissal – Do you have the right to terminate a contract by giving notice of a specified length? (A common feature of employment.) This is less common in a contract for services which usually ends on completion of the task, or if the terms of contract are breached.
- Employee benefits – are you entitled to sick pay, holiday pay, pensions or expenses?
- Length of engagement – long periods of working for only one client may be considered typical of employment.
- Personal factors – Is the Contractor reliant on him/herself for obtaining work? Is the contractor working for a number of clients on concurrent projects? Is expenditure on office equipment and accommodation necessitated by the nature of assignments undertaken?
- In Business of your own accord – Evidence that you are an independent business operating as any other business would be expected to do and not as an employee. A strong point is evidence of Marketing and Advertising of your company services. Something that BITE provides and invoices for if required through a B2B Invoice for Advertising or Marketing services on the Internet.
- Mutuality of obligation – An ongoing obligation to provide work and to do work provided should not be an explicit or implicit term of the contract. Further work should be under a separate contract. Provisions enabling the client or agency to extend without the consent of the contractor should be avoided.
- Exclusivity – It is entirely inappropriate for an independent contractor to be unduly restricted from providing services for other clients.
- Intention – As the intention of the parties is not to create a relationship of employer/employee, a clause should confirm the independence of the parties and that there is no relationship of employment. To support this reference to procedures for sickness or absence, misconduct or overtime should be avoided.
The full Inland Revenue guidelines can be found at www.inlandrevenue.gov.uk/ir35 .
In order for an assignment to be considered ‘self-employment’ for tax purposes, and therefore outside the scope of IR35, the assignment will have to pass the tests outlined above. In addition, such contracts will only be submissable as ‘self-employed’ if the end-client is prepared to outsource responsibility for tasks or deliverables to the contractor. It is unlikely that many assignments will satisfy the tests for self-employment unless clients are willing to change working practices to accommodate self-employment contracts. In practice clients may be reluctant to do this.
Great care needs to be taken in determining if a contract is one of self-employment, and therefore outside the scope of IR35. If a company treats revenue from an assignment as falling outside the scope of IR35, and if the Inland Revenue does not agree with this treatment, the Inland Revenue will recover the underpaid tax and interest. They also have the right to issue as a penalty 100% of the underpaid tax, in addition to the additional tax due.
It will be important that you agree with your accountant or adviser the best action to take and this may mean sending your contract (usually via your accountant) to your local Inland Revenue Office for assessment. However, this may take time and you may have completed your contract before you get a decision. SO DON’T GET CAUGHT OUT. SEEK ADVICE AND MAKE PROVISION FOR PAYMENTS TO THE INLAND REVENUE AND COMPLETE A CONTRACT LOG.
Contract Direct – Get a Safety Net
Do you have the opportunity to contract direct to the client?
BITE provides a “safety net ” for contractors who require extra security. This can provide protection against being left high and dry if the client goes “bust” or “does a runner” or is just a slow payer.
We help ensure the contractor gets paid!
- BITE’S credit checking service ensures the client is assessed and any risk understood and managed.
- BITE’S Credit Control service collects the contractor’s money in a timely manner.
- BITE’S insurance service guarantee’s payment for satisfactory work completed within the contract terms.
- BITE’S Professional Indemnity insurance covers contractors for reasonable professional errors or mistakes.
The ‘safety net ‘ also helps provide or source the necessary contract advice to assess whether you may or may not be caught by IR35 and thus whether you can save approximately 20% of your pay, or make provision for payment to the Inland Revenue.