IR35 Guide: Audits, Be Prepared
If you decide that IR35 did not apply then be well prepared in case HMRC do pick you out for an investigation. If you've got documentary evidence of spending time deciding on the contract's status and the reasons for your decision, then any penalties will be far less if you've ultimately got something wrong in an IR35 status audit.
In an investigation HMRC may start off assuming you’re holding out on them; it's best to be prepared with evidence that you’re running a proper consultancy business. If there is an agency involved in a particular contract, and your relationship with the end client is a good one, then documenting the real arrangements might be helpful; remember it must be accurate as you might need to rely on it in court.
Passing an IR35 audit is a bit like passing a driving test. You can drive safely and competently and still fail a driving test on a technicality. Same with IR35. it’s difficult to be sure exactly what the inspector will look for; they'll weigh up many different factors and try to build an overall picture of the engagement. Initially, the strongest status indicator is the contract you signed. As time goes by the underlying working arrangements become key.
If there is an agency involved HMRC may also decide to look at the contract between the agency and client. Important elements of the contract(s) and working arrangements, might include:
- That the written terms are relevant to the work you are doing - tailored to the project, rather than a generic template.
- There are substitution clauses, allowing appropriately skilled alternative workers in your place should it becomes necessary. Ideally there would be evidence of actual substitution at your expense, or evidence of an agreed procedure with the client.
- Whether the client can terminate without a notice period?
- If the worker, rather than the End Client, has day-to-day control over what, when, where and how work is completed?
- Is the contract project-based, with defined deliverables and milestones?
- Are there financial penalties for missed deadlines and contract delays?
- Would mistakes be fixed at your own expense?
- Is the business working exclusively for a single End Client?
- Do you work with your own materials (Laptops, software, specialist tools) on site?
The more of these points that indicate self-employment, the better the chance that the assessment will decide that IR35 does not apply.