The so-called “Friday to Monday” scenario is one of the oldest and most recognisable IR35 risk areas.  It describes a situation where an individual leaves employment on a Friday and returns the following Monday to undertake broadly the same role, but this time through an intermediary (typically a limited company).  The day-to-day relationship remains unchanged, however, the tax treatment changes significantly.

This practice was a primary driver behind the introduction of IR35 way back when in 2000, and more than two decades on, it remains firmly in HMRC’s sights.

Friday to Monday = disguised employment

By moving from employment to contracting, the individual may look to pay themselves via dividends rather than salary, reducing their income tax and National Insurance contributions.  However, from an employment status perspective, these arrangements are not genuine business-to-business relationships, and typically amount to disguised employment – i.e. inside IR35.  The only difference is that payment is routed through the individual’s limited company rather than the client’s payroll.

Why HMRC frowns upon Friday to Monday

The tax position in operating as outside IR35 is significantly more favourable than that of an employee, and so HMRC views Friday to Monday arrangements as a clear tax avoidance risk.

Where the working relationship remains the same, HMRC would argue that the underlying employment relationship never truly ended.  These cases are often easy for HMRC to pursue and shut down quickly as it is extremely difficult to argue anything other than an inside IR35 position.  Subsequently, the contractor is required to pay broadly the same tax and National Insurance as an employee, regardless of their limited company structure.

More common than you think, but don’t bury your head in the sand!

At Bauer & Cottrell, we speak to contractors quite regularly who have decided to go into business and have taken on their most recent employer as their first client.

In a lot of cases, it is because the organisation still needs the worker’s skills and has not yet been able to recruit a replacement, and because it provides a level of income security for the contractor while the business gets off the ground.  

IR35 does not prevent an individual from incorporating and operating through a limited company, however the starting assumption in the scenarios described above is almost always that IR35 applies.

We have even seen cases where individuals have been made redundant to reduce headcount and then invited back to perform the same role as a contractor. This exposes the client to significant employment status and rights issues, in addition to significant IR35 risk.

Which party holds the risk?

If the client is a small company, the contractor will be liable for the IR35 decision themselves under the pre-existing rules, and risks being faced with a HMRC tax bill and penalties if they are deemed as careless in the handling of their tax position.  

Engagers operating under the Chapter 10 Off-Payroll Working rules (applicable to public sector and medium / large private sector companies) face similar risks if they engage in a “Friday to Monday” arrangement.  Engagers also run the risk of being taken to an employment tribunal if the worker later claims they were still an employee for rights purposes.

Myth – “taking a short break between contracts prevents inside IR35”

A common misconception we are asked about frequently is whether taking a short break between employment and contracting removes the risk of being caught by IR35.

The short answer is no! A gap of a few weeks makes no material difference if the role and working arrangements are broadly the same.  

This of course, is quite different to a contractor returning to an ex-employer some years later to undertake work that is not connected to their previous employment, in which case “Friday to Monday” does not apply.

Can you ever contract with a previous employer “outside IR35”?

Despite the risks associated with Friday to Monday, it is possible for the terms of an engagement to genuinely change from one day to the next. To stand any hope of demonstrating an outside IR35 position, there must be significant distinctions and legitimate reasons for moving from employment to a contract for services – all backed up with evidence.  It won’t be enough to simply put in place a strong written contract. 

Factors that would need to be in play to improve your position and support a genuine contract for services include:

• A genuinely different role, such as moving from an operational position into a finite, project-based consultancy delivering a defined outcome, bearing financial risk for the successful delivery.
• Material changes to the working practices, where the contractor controls how the work is done, has a genuine right to substitute, is not obligated to accept work, and is not embedded in an internal team.
• A commercial rationale, a legitimate reason for the change, not simply to reduce tax or employer costs.
• Having other clients concurrently, showing the individual is operating an independent business rather than relying on a single client.

Even then, these cases require careful handling and supporting evidence.  Contracts need to be drafted with great care and there should be substantial evidence showing significant differences in the relationship and day-to-day working arrangements.

Conclusion: if it quacks like a duck…!

So, in summary, moving from employment to contracting with no material changes to the underlying relationship will almost always amount to disguised employment (inside IR35). 

Contracting for your previous employer is not impossible, but it’s rarely straightforward and care needs to be taken so you are able to show evidence to support your position. Simply changing the contract wording or taking a short break won’t alter the reality.

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