Earlier this month Sky Sports pundit Alan Parry lost his IR35 appeal against HM Revenue & Customs over a £356,000 tax bill. The football commentator, 74, contested an HMRC claim that the contract held between his own company, Alan Parry Productions Ltd, and BskyB over the five years to April 2019, amounted to an employee relationship, rather than self-employment.
Under IR35 rules, a set of tax laws which govern off-payroll freelancers, if a contractor is deemed to be a “disguised employee” for tax purposes, and not genuinely self-employed, they must pay PAYE and national insurance contributions.
HMRC’s IR35 win came down to how tightly worded Parry’s contract was, giving BskyB more control than it needed, according to Parry’s lawyer Chris Leslie.
Commenting on the case, Dave Chaplin, chief executive of tax compliance firm IR35 Shield, told the Financial Times that contractors and employers should be aware that “the contract is king”.
What the Alan Parry case means for freelancers
HMRC’s win against Alan Parry will no doubt be uncomfortable reading for freelancers. Once again it brings into sharp focus, HMRC’s intent on tax equality and its use of the off-payroll rules. While a fair tax system is a good thing, the legalities are difficult to navigate.
If there is one thing to learn, it’s that you must also take responsibility for managing a status determination of inside or outside IR35 yourself and avoid any reason for doubt in the contract. Quoting Chris Leslie, the lawyer who represented Parry, Parry’s contract contained ambiguity which gave Sky “more control than was needed or wanted”.
This word “control” should be the biggest learning from this. You must ensure you are the controlling party, not the hirer, so take responsibility for generating a contract to reflect it. As the Parry case shows, standard company contracts won’t work when it comes to IR35.
Instead, they must reflect the work you will undertake, how you will do it – e.g. with your own equipment in your own working hours, and that you have the right to substitute yourself for another professional.
Substitution clauses are a helpful way to show you are operating as a business and not as a quasi-employee, as Lorraine Kelly successfully argued when she proved she was instrumental in determining who covered for her when she was on holiday.
Here are some other things you can do to ensure you stay the right side of the law:
Recognise that off-payroll represents a risk to a client
They want and need to get it right, because they don’t want a tax bill for getting it wrong. It’s true that when off-payroll first came into the private sector, there were some companies that were so concerned about getting determinations wrong that they banned contractors altogether. The world has moved on, as the impact of not having access to flexible contingent skill hit home.
Despite seeing some blanket use of inside IR35 contracts to manage the risk, it’s starting to become the anomaly.
Overall, the decision to engage contractors and freelancers has been good news not just because it opens options for work, but because it’s highly likely that a company will be ready to discuss the arrangement and create a contract which clearly falls outside IR35. But you need to be informed to do this and understand the nuances of the legislation.
There are three specifics to prioritise:
Mutuality of obligation
People who get a contract right are using statement of works to set out exactly what they will do by when. This also meets another HMRC test called “mutuality of obligation” (MoO) whereby you show that you are not like an employee and paid simply for being at your client’s disposal, instead you are paid to deliver a specific piece of work.
Overall, being savvy about how MoO helps determine a status will help you get into a position where you can confidently negotiate – there’s evidence that the more informed you are, the more likely you will secure an outside status determination which will hold with HMRC.
Many self-employed professionals find it helpful to undertake their own assessment of all the rules first, so they can adjust their approach to working with a client and create a watertight seal.
Understand being in business on your own account
In the high-profile Kaye Adams case, Kaye demonstrated that she was in business on her own account, and this was pivotal to being deemed outside IR35. Things that will help you show this are to have multiple concurrent clients, a dedicated office, and even employees.
Show you are not part and parcel of the organisation
Working practices are critical to compliance. If you behave like an employee, then you will be treated like one, giving HMRC more justification.
Quick wins to stay out of IR35
Quick wins to avoid scrutiny are:
- Develop a brand, and have a dedicated website and social media presence
- Trademark your company name
- Invest in your own phone, computing equipment, printer etc
- Invest in yourself through training and memberships to professional bodies
- Ensure you have things like professional indemnity and liability insurance.
Things to avoid to stay out of IR35
For all the do’s there are also a lot of do nots. Here are just a few of the things that can get you into hot water:
- Going to company training and social events
- Getting involved in appraisals or any HR matters
- Accepting performance bonuses open to employees, or take advantage of things like gym memberships
- Being misrepresented as an employee – make sure it’s clear you are a contractor or associate on your ID badge, email address and org charts
- Taking on new work before you have adjusted the terms of the existing contract
- Taking days off with permission – you should inform your client you’re not available
- Working the same working pattern as staff
These things combined with knowledge and understanding, and following good practices and behaviours, will stand you in good stead when it comes to running an IR35 status assessment with a client. The way you conduct business and engage with them should be clear and correlate to an outside determination.