A guide to IR35 compliance from a UK based business owner: The inside-outside hokey-cokey
I’ve always liked to think of the new year as bringing fresh opportunities and reasons to be hopeful. However, as an independent consultant and business owner, the looming threat to the end of HMRC’s ‘light-touch’ approach to IR35 legislation compliance in 2022 is worrying. In this post I’m intending to cover some of the efforts I’ve taken to demonstrate that I am legitimately in business, and cover off answers to the important questions I had last year:
- How can I protect myself from a potential HMRC tax investigation?
- What steps can I take to prevent myself from being ‘low hanging fruit’?
Disclaimer: I’m not a tax consultant (or even particularly knowledgeable about tax) and it should go without saying that any advice given here is my personal opinion.
If you decide to proceed and read this article, please heed the following advice. Read it twice — once as ‘you’, the business owner and likely director of your company, and then secondly as ‘you’, the employee of your business. Whether you like it or not, there are two of you in the business, and separating your thinking is paramount to the premise I’m talking about in this blog.
Firstly, if you haven’t got insurances to cover your back against HMRC, I think you’ve already lost. It’s worth stating that tax insurances generally come in two ‘types’, enquiry and liability. Enquiry cover protects you for the investigation (when they turn up at your door) and defence (if they decide to proceed with a case), whereas liability cover also adds the, well, liability and penalty costs if you’re deemed to owe any retrospective taxes. Make sure you know which cover you have and what you’re exposing yourself to because the first line of protection against IR35 is your own knowledge. Don’t bury your head in the sand — you’re a business owner, and it falls on you to know the answers.
Some highlights to check:
- Total indemnity for defence costs (fees can quickly add up to the £000’s, so ensure you’ve got a minimum of £50k of cover).
- Cover for single or multiple investigations (multiple investigations would be bad luck indeed, but aren’t unheard of).
- Cover for retrospective tax years (this is important if you’ve been in business for a while).
- Cover for liability, penalties and interest payments (for total peace of mind, shift the burden of any payments to an insurer).
- The quality of your representation (check your insurers will use a reputable tax firm to defend you).
You can have all of this protection for ~£300pa — just get it already.
No one likes to consider that they might actually be caught (‘inside IR35’) by the legislation, as everyone believes themselves to be truly independent. The sad fact is that this often may not be a true representation of your situation. Forget CEST (we all know that’s worth less than the server fees they pay to host it), but there are some genuine things to consider (and fix, if necessary) to mitigate as much risk as possible.
Strap in, because this is going to be a long section — everything is caveated by saying ‘this is not a sole determining factor’ but question yourself if you find yourself at odds with any of them.
1. Your clients. How many do you have? Is it the same one for the past multiple years? Remember, you’re trying to prove to HMRC that you are a genuine business that is in a service relationship with a/multiple client/s. A service relationship has clear deliverables and allows flexibility in how the work is delivered, with the business providing personnel to execute the contract terms.
Mitigation: Source multiple concurrent clients; exercise the right to substitution to check it’s in practice not just hypothetical; cease providing services immediately if you are treated as an individual instead of a business.
2. Services. What services do you provide? Is it just one single service? Providing the same service over time is absolutely fine (and how the majority of independent contracting companies operate), but you need to remember that ‘you’ are not a service — ‘you’ are an employee of your business there to deliver an outcome requested of you by your employer (your company).
Mitigation: Think about service outcomes and not people as resources; widen your income stream by offering different services (recruiting, consulting, training etc.); charge by service not by the person.
3. Subcontracting. Have you ever used the services of another company to deliver on your behalf? Whilst this may appear to only relate to substitution, it also refers to other common services your company requires e.g. marketing, website building and office administration. If you consider a genuine business, they will often both source and fulfil services depending on the client. This demonstrates that you are in business-to-business relationships and therefore handling contracts, payments and experiencing a level of financial risk.
Mitigation: Engage with other businesses to support in service delivery; source contracts for your business and not just for you, as they can be fulfilled by subcontractors on your behalf; recruit or employ more than one person.
4. Engagement. To me, this is the most important test as to whether you are legitimately in business — do your clients know the name of the company you are providing services through? If they don’t, you’ve got a problem as they may not even know you aren’t their staff! Whenever you strike up a business conversation with someone seeking your services, remember that you’re having the discussion as an owner, not an employee — be clear to them who they are speaking to in the conversation. This dynamic is especially interesting when engaging with recruiters who may source work for your company.
Mitigation: Engage with companies as your business and not as ‘yourself’; brand yourself appropriately (company lanyard, provision of your own equipment etc); introduce yourself as a consultant of X company.
5. Promotion. Is your business genuinely and actively seeking more clients? The success of your promotion doesn’t really matter, although it would certainly help with points 1–3, it’s the premise that you are seeking income for your company that’s important. There are some easy steps like creating a website, a LinkedIn company page, and sharing some simple marketing materials that can make all the difference.
Mitigation: Set up a website with information about your service offerings; configure a company email address; send free marketing material to your clients.
What steps have I taken?
It has taken me a year of mindset shifting, however, I am now confident in my ability to demonstrate that I am the owner of a legitimate business that provides services to clients. To achieve this, I needed to remember that I wasn’t just a contractor, I owned a business and therefore could no longer commit to 40hrpw engagements.
- Branded my company using LinkedIn, Twitter, Instagram, a website and a company email address.
- Widened our income stream to offer multiple services, without any names of personnel attached. This gives me the freedom to outsource and subcontract as necessary. We now provide Agile recruitment, Scrum training and consulting services to global organisations.
- Invested heavily in advertising, including marketing material, paid for SEO, and content creation.
If you ignore the time investment to achieve this, the whole ‘protect and prevent’ strategies I’ve listed above have probably cost me £2,000 to implement. Does that sound like a lot? I guess you’d have to value that against the increased income it has generated and my more confident attitude towards IR35 compliance. IR35 is not something you should be passive about. If everything I’ve spoken about sounds like a lot of effort, feel free to designate your next contract as ‘inside IR35’.
If you’d like to discuss any of the content I’ve mentioned here, reach out to me via LinkedIn, my company website (optilearn.co.uk) or email (firstname.lastname@example.org).