It is now crunch time for contractors and they must decide their IR35 status and what to do before 19th April. The Judicial Review decision has changed nothing in terms of how the legislation is to be interpreted. The Inland Revenue have amended their internal and external guidance in light of Justice Burton's comments, however the established case law remains the determinant. So what are the options available?

The contractor can:

1. Pay the Taxman - Decide he is caught and make the necessary arrangements and payments
2. Fight the Taxman - Get his contracts, business and insurance in order and prepare for a fight.
3. Ignore the Taxman - Assume that a so-called 'IR35 proof' contract will see him through (Look out for interest, potential penalties and watertight disclaimers)

1- Pay the Taxman

There are undoubtedly many contractors who are engaged in a manner very similar to that of an employee. Such contractors have typically been with the same client for a number of years, working alongside employees and are doing whatever work the client requires. A contractor in this situation, working under a standard contract may have little option but to pay up and speak to his accountant about lessening the blow through pensions or other such means.

The Inland Revenue would like most contractors to believe that their engagements fall within the scope of the legislation due to the contractor:

• having a contract for over one month
• working on the client's premises
• using the equipment of the client
• being paid an hourly or daily rate
• completing a timesheet to be signed by the client

We could write at length as to why these points are largely inconclusive but let us just say that it would be unwise for a contractor to assume that the nature of their engagements are within IR35 on these questionable points alone. Many other factors need to be considered and it is best not to jump to conclusions. Contractors, who are caught now, should seek professional advice if they want to operate outside IR35 in the future. It will involve some changes and additional expenses and a degree of effort but if the right work can be found then there are agencies and clients who are prepared to accept the independent status of contractors and work towards genuine business-to-business terms.

2- Fight the Taxman

If a contractor wants to prove their exempt status and take on the Inland Revenue from a position of strength then he will need more than just a contract. Being in business on your own account requires an entrepreneurial state-of-mind and a stack of supporting documentation. So the contractor needs to:

Sort out the Contracts

• Ensure your contract is drafted by a recognised IR35 expert or checked by one
• Obtain a formal record of why your contract is outside IR35
• Ensure the agency/client contract mirrors your contract, or
• Obtain written confirmation of your client's understanding of the relationship

Sort out the Business

• Equipment, stationery, website, advertising, suitable substitutes etc.

Sort out the Insurance

• Professional Indemnity, Public and Employer's Liability, Tax Protection etc.

Once he is correctly set up then he should ensure that over time he does not become 'part and parcel' of the client's organisation. Wherever possible he should seek to distinguish himself from the client's staff and maintain his independent status on-site. Now he can get on with running his business - safe in the knowledge that should the Revenue question your status then he is well prepared for a fight.

3- Ignore the Taxman

Regardless of the opinion of the Revenue there are many contractors working on engagements that are genuinely outside IR35, even engagements obtained through agencies. There are some very well drafted contracts being used by agencies but by far the majority of so-called 'IR35 friendly' contracts being offered do not provide anywhere near the level of IR35 protection required. This includes contracts used by most of the top 20 IT agencies, who account for 64% of the market. Most industry experts agree that the contract must be project-based in order to escape IR35 but this fundamental factor is not considered in so many agency contracts. They also tend to fall down in the areas of control and substitution. Inserting any old substitute clause will never defeat IR35 but going too far the other way can also be dangerous.

While most contracts offered by agencies do not offer sufficient IR35 protection, many off-the-shelf IR35 proof contracts contain substantial IR35 protection but are not suited to the knowledge-based industries. They are liable to go over the top in some areas such as including a completely unfettered substitution clause. It is true that a genuine unfettered right of substitution will almost certainly defeat IR35 but this is hardly ever possible to implement in the IT industry. Such clauses (and contracts as a whole) are therefore open to being interpreted as a sham. How is a proposed substitute or sub-contractor able to enter the site and logon to the system without a client security pass and system password? Would the client not have some duty to its shareholders to protect the company's system from possible security violation by checking the identity and credentials of those in a position to manipulate the system? So, just as many agency contracts will not stand up to scrutiny, contracts that promise everything must also be a true and complete representation of the nature of the engagement and the genuine rights and obligations of the parties.

If a contractor chooses to ignore the taxman he should be aware of the possible consequences. According to Inland Revenue guidance 'IR109' - if you have incorrectly operated PAYE and/or NICs you will be asked to pay the Inland Revenue the amount that you should have deducted, together with interest (at 8.5%) and also penalties (starting at 100%) where appropriate. If you have taken all reasonable care the Inland Revenue will not seek penalties but will demand interest. In a recently published document the Revenue has stated that "An employer might fail to meet its obligations to file a correct return because of a genuine misunderstanding about the rules caused by their newness. This would be taken into account, along with the effort made by the employer to establish whether a contract is subject to the new rules, when considering penalties." So what amounts to reasonable care and effort?

Asking the Inland Revenue for an opinion - The Revenue has invited any contractor unsure of their status to submit their contracts for a free assessment so a contractor can follow their (rather one-sided) guidance.

Obtaining an independent legal opinion - If a contractor has sought legal advice and has obtained written evidence that the engagements fall outside the scope of the legislation then the Inland Revenue is unlikely to impose penalties. If a demand were subsequently made then the contractor would probably wish to appeal. Obtaining an accountant's opinion - In usual circumstances it is the company that instructs the accountant how to prepare their accounts rather than the accountant instructing the company. All professionals have a duty of professional care but will usually have a disclaimer to protect them, so a second legal opinion would be well worth considering for the contractor to demonstrate all reasonable care and effort.

The contractor should not rely upon:

An agency's opinion - If the agency suggests that a contract is outside IR35 then the contractor should check the disclaimer and ask for the contract between the agency and the client. Contractors shouldn't assume that because the contract they have signed looks fine that the Revenue has no grounds to look at the Client/Agency contract, as they will want to check that the contractor/agency clauses are not a sham. If the Revenue approach the Client and find a typical temp-worker supply contract with direction and control included then every contractor who has worked for that client can expect a demand for IR35 taxes.

His own opinion from internet / colleagues / magazines / chatting down the pub etc. - as the Revenue has offered their own review service and there are a number of recognised independent experts able to advise on IR35 status the Inland Revenue may not look too kindly on those who have decided that they are outside IR35 without any documentary evidence or legal advice and maximum penalties could follow.

In conclusion, deciding not to pay IR35 taxes could be a potentially costly game unless the contractor has taken the necessary precautions. The contractor must be able to demonstrate the effort they have made to establish whether a contract is subject to IR35 and that they have taken all reasonable care.

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