Contractors' Questions: Am I safe from IR35 when moonlighting?

Contractor’s Question: I'm PAYE on a 9-to-5 with an employer but I also used to do some freelance contracting on the side up until January; I was doing this as a sole trader.

Now, this one firm I freelance for as an engineer insists I become a limited company. There is no written contract between myself and the client firm; they simply email each month asking my availability, I reply and then accept or decline shifts. The work I do is the same as the full-time employees of the firm. Am I safe from IR35?

Expert’s Answer: In general, the IR35 legislation potentially applies where an individual uses a limited company to contract on his/her behalf with an agency or client. In order to operate outside of the IR35 legislation (and obtain a tax advantage), there must be a contractually enforceable right to substitute the individual, an absence of mutuality of obligations and all other relevant factors must suggest self-employment.

The starting point is for the contract to accurately reflect a project basis to the engagement. This is so that there is no obligation to undertake work in excess of the stated project objectives and the engagement terminates automatically when the work has been completed. In essence, the client's capacity should be that of a customer of a business carried on by the individual and not a temporary employer.

Unfortunately for you, based on the information provided it is highly probable that the IR35 legislation applies as the work involves providing a skill-set which is ‘part and parcel’ of the client's business. As the work involves undertaking shifts of fixed duration in the same manner as the client's employees, the First-tier Tribunal (Tax Chamber) will infer that mutuality of obligations, i.e. the minimum pre-requisite of employment, is present. Since the client requires a specific skill-set rather than a service, substitution is not a realistic proposition.

The absence of a written contract does not obviate the IR35 legislation as HM Revenue & Customs can deduce the working practices from evidence obtained from the individual and client. Notwithstanding the IR35 legislation, it is essential to use a competently drafted contract to minimise the risk of a costly dispute and provide clarity to the working relationship. Ultimately, an impartial legal analysis of the contract and working practices from an employment status and commercial perspective would provide the best course of action, together with advice about alternatives to using a limited company.

The expert was Martyn Valentine, founder of The Law Place, an IR35 advisory for contractors.