IR35 compliance checklist for IT contractors

With many businesses still facing tech skills shortages, IT contractors remain in high demand. While this presents a lucrative opportunity, it also comes with the responsibility of navigating IR35 regulations.

Although changes in legislation in 2017 and 2021 mean that the responsibility for determining IR35 status now lies with the end-client in many instances, there’s still plenty contractors can do to advocate for and protect their own interests, writes Kieran Firmstone, tax consultant at Qdos Contractor.

1. Understand who’s responsible for the status determination

Since April 6th 2021 in the private sector, all medium and large-sized companies with a registered UK branch have been responsible for determining their contractors’ IR35 status.

In the private sector, to be classified as ‘medium or large’ a company must meet two of the following three conditions: have an annual turnover of £10.2 million, a balance sheet total of more than £5.1 million, or more than 50 employees on average in an accounting year.

If none of these conditions apply, the onus falls on you, the contractor, to assess your own IR35 status. Accordingly, you will need to demonstrate what HMRC terms as “reasonable care” in assessing whether you fall ‘inside’ or ‘outside’ IR35. Most of the time, this will mean seeking out the support of a qualified status adviser.

2. Obtain a contract review

In an IR35 investigation, HMRC will usually request a copy of the contract(s), in question and generally approach the end-client directly to check that the actual working practices mirror the written terms.

It’s therefore always advisable to have your contract reviewed by a status or IR35 expert, so you can be reassured you’re paying the correct tax.

A thorough contract review will involve an IR35 specialist examining both the written contract and the reality of the working relationship. This dual assessment ensures that the contract contains clauses that support an ‘outside’ IR35 determination, and that the day-to-day working practices align with the terms stated in the contract.

As a general rule, be wary of generic, boilerplate contracts which may not accurately reflect your working relationship. For example, if you’re hired to develop custom software, ensure the contract specifies your autonomy over how and when you complete the work, highlighting your control over the project.

3. Educate your end-client

You’d be surprised how many clients understand very little about their options when it comes to IR35 and the off-payroll working rules.

There can be a tendency to issue blanket ‘inside’ IR35 determinations to avoid any risk. However, this obviously puts you, as the contractor, at a disadvantage.

Clients may also believe they are obligated to use HMRC’s own status determination tool, CEST. However, 20% of CEST usage results in an undetermined outcome, and HMRC has challenged a number of status assessments made using their own tool!

We’d recommend you educate your client about the options available to them.

4. Obtain a ‘Confirmation of Arrangements’ document

A Confirmation of Arrangements (CoA) is a letter which seeks to obtain a signed agreement as to the true nature of your working relationship with your end-client.

Typically, this document will show that you can provide a substitute; don’t work under the direct control or supervision of the client, and provide services to the client in the style of a self-employed IT consultant rather than a permanent employee.

If you encounter any resistance from the end-client in signing a CoA, clarify that it isn’t a legal document and is only used for tax purposes, and that having such paperwork in place is beneficial to you both in the event of an HMRC investigation.

5. Keep detailed records

If we’ve seen it once, we’ve seen it a million times – in the event of an IR35 enquiry, contractors are able to recall instances that evidence their ‘outside’ status, but don’t have the physical records to back it up.

However, this evidence can be key in halting an inquiry before it even gets started!

Ensure you keep a file entitled ‘Outside IR35 Evidence.’ This will include confirmation of self-employed working practices – such as control over your own hours, control over projects, and times you have provided a substitute – and also how you operate as a contractor outside of the working relationship. For example, maintaining your own website, purchasing your own software and equipment, tendering for contracts and keeping note of work performed for other clients.

For example, tools such as Qdos Status Review provide an expertly-determined Status Determination Statement, a consultancy service for additional queries, and all ‘outside IR35’ determinations are backed by comprehensive tax liability cover.