What Records Should I Keep for IR35?

Contractors are an important part of the UK economy, contributing more than £300 billion every year. It’s a broad term which describes the way you work for your clients, and can cover a range of roles, from HGV drivers and bricklayers, architects, accountants, engineers, and plumbers to name just a few.

HMRC decided this style of working came with a high risk of tax avoidance, so IR35 legislation was introduced to minimise the threat within the contracting sector. If you carry out work as a contractor or you’re planning to become one, it’s essential you know what these rules mean for you, and what records you must keep. We thought it might be helpful to explain them. Don’t worry, we’ve got you something much better for your birthday.

What is IR35?

IR35 was first introduced in the year 2000 to crack down on tax avoidance within the contracting sector, but the rules have changed several times since. The name IR35 comes from Inland Revenue’s Press Release 35 – the very first press release that announced its arrival more than 20 years ago.

With IR35, your employer can’t force you to work without benefits, and if the rules apply to a contract you’re working on, your client will need to pay you in the same way they would pay any other employee.

How do I know if IR35 applies to me?

According to HMRC, whether IR35 applies or not depends on the employment status of the person doing the work. If the client you’re working for is classed as a ‘small company’, then it’s your responsibility to assess whether or not your contract is inside IR35 rules. The process is known as ‘determining status’.

They’re considered to be a small company if they have:

You can appeal their decision if you don’t agree with it. HMRC’s ‘Check employment status for tax (CEST)‘ tool will help!

The rules are applied to each individual contract, so if you’re working on several contracts for the same client at once, you might find some contracts come under the off-payroll working rules and some don’t.

What records should I keep to demonstrate my IR35 status ?

It’s helpful to keep an IR35 compliance file for each contract, just incase HMRC ever fancy a chat about your tax returns.

Document the working relationship

Agree the level of control you have over your work in terms of providing your own equipment and setting your own hours. Did you (or could you) send along another worker in your place at any point? Are there any mutual obligation commitments? An open, honest chat with your client or recruiter should also help prevent problems later on. Just make sure you make a note of when you had the chat, who was present, and what was agreed.

It’s well worth preparing a contract or agreement document which includes a clause stating the exact work you’re undertaking. It should also explain that you can choose when and where you work, and whether you can substitute yourself for another worker.

Add a point in there too around boundaries. For example, the right to work from your own premises if you decide to, and highlighting the fact you don’t take any employee benefits. A non-exclusivity clause is a good idea as well. This outlines your ability to work on other projects without needing to get the permission of your client.

The whole point here is you need a watertight contract that accurately reflects your working practices and backs up your IR35 status. Consider getting a trusted accountant or IR35 specialist to look over it for you.

Use the CEST tool, and keep the evidence

Whether it’s your responsibility to confirm your employment status or down to the client, make sure have a copy of the Statement of Determination Status (SDS) from HMRC’s CEST tool. You should keep a copy of the information you entered too, just in case anything changes and you need to refer back.

Demonstrate the way you run your business

A client contract is a good place to start, but it’s also a good idea to keep other records which prove the way you work is more like self-employment than employment-in-disguise. These could include things like:

Why is record-keeping important for IR35?

If HMRC suspects any hint of fraud, it can launch an investigation that looks as far back as 20 years. If you’ve been working outside of IR35 but HMRC thinks you should have been inside, it’s likely to have huge financial implications for you.

It’s not worth the stress, cost and hassle of getting caught out, however innocently.

Learn more about Pandle’s timesaving bookkeeping features for contractors, freelancers, and small businesses.