Being able to demonstrate that you are "in business on your own account" can be a strong pointer to being outside of IR35. In the IR35 case of Atholl House, despite the primary factors of personal service and sufficient control being present, the judge upheld the appeal, on the basis that the contractor, Kaye Adams, was in business on her own account.
The underpinning principle of IR35 is that, were it not for their limited company (also referred to as a "Personal Service Company" or PSC) and an agency in between, the contractor would in fact be an employee of the end-user client and pay tax accordingly. The financial impact of IR35 due to being classed as a 'disguised employee' is significant.
In addition to issues like control and personal service / substitution, a contributing factor to demonstrating that a contractor could not be an employee and therefore not within IR35 is if they can be proved to be in business in their own right.
HMRC will contend that the provision of work by a contractor is the same as that of an employee and that the contractor is part and parcel of the end user client’s business. In other words, the taxman will see that contractor as an employee, with all the tax implications that brings with it.
Part and parcel
To prove to HMRC that a contractor is not within IR35, you need to look at both angles. The first task is to draw up a list of the differences between the contractor and the client’s employees.
As the contractor is not an employee, there should be some fairly obvious differences, such as set hours, benefits, pension arrangements, access to social clubs, parking, expenses arrangements, use of a subsidised staff canteen and so on.
The contractor will also be able to demonstrate that they are not part and parcel by referring to correspondence with the end user client that shows clearly they are not under the control of the client’s employees.
Having established there is a clear difference in working conditions and benefits between the contractor and the client’s employees, the next stage is to demonstrate that the contractor is in business for themselves.
This can take the form of marketing materials, such as:
- A website, business cards and company stationery
- Listings in business directories like Yellow Pages
- Advertising in trade publications.
When naming their limited companies, contractors avoid using their own names as this implies they are only providing their own services, which falls right into HMRC’s definition of a personal service company (PSC).
If you have John Smith Ltd on your business card, the implication it is that John Smith will be completing the work, so the business is a PSC. If you call the company ABC Computing, you are simply providing computing services, which could be supplied by a colleague.
Whatever you do never have a business card with the client’s logo or details. This will close the case on any contractor as being part and parcel.
Business costs – office equipment, training and subscriptions
Contractors who can show they have bought their own computer and office equipment, software licences, business insurances and have also kitted out an office, even if it’s at home, will also be demonstrating they are running a business.
A well equipped home office with shelves full of reference books and with evidence of perhaps a partner working on the company’s accounts can be useful. Other signs of being in business are perhaps invested in membership of a professional body, training courses and subscriptions to trade magazines.
Some contractors, particularly in the engineering field, are required to invest in personal continued professional development (CPD) in order to retain their chartered status, and payment for CPD by the contractor can be used as another indication of being in business.
By the very nature of contracting it is frequently not possible to run concurrent clients, but cases are judged on a case by case basis. A long history of delivering similar services to a range of clients will help to demonstrate you are in business on your own account.
If a contractor is earning £75,000 a year doing high end development work for a corporate client, and maybe £5,000 per year producing websites for family and friends, then HMRC may not take this as evidence by itself that the contractor is in business for themselves. Whilst there is no case law around specific proportions, tribunals will consider income from multiple sources, and compare percentages from other sources against the contract under review.
For example, if the contractor works two days on one contract for £35,000 per year and three days for £40,000 on another contract for a separate client, then this is strong evidence of genuine concurrent clients.
During an investigation HMRC will look at all the evidence on a case by case basis taking into account all aspects of the business but the major factors when deciding if a contractor is inside or outside IR35 still remain the issues of control and personal service.