Top 3 factors in determining IR35 status? - IR35 reform series, pt.2
Less than 12 months now remain before the ‘off payroll’ rules of IR35 are extended to medium and large companies within the private sector. At this point, the onus will be on companies to determine the IR35 status of contractors they engage - along with the financial liabilities for incorrect decisions!
For those still unsure what IR35 is;
“IR35, or the ‘Intermediaries Legislation’ as its often referred to, is a tax legislation that was introduced in 2000 with the aim of preventing ‘disguised employment’. And by that I mean it was brought in with the intention of stopping contractors working through a personal service company to avoid tax when their working arrangement resembles employment.”
- Seb Maley, CEO of Qdos Contractor | [Full interview with Caspian One, here]
HMRC have provided information on what working practices constitute an ‘inside’ or ‘outside’ IR35 status. However, the overly complex nature of these factors has lent them to become open to interpretation… making it increasingly difficult to accurately determine a contractor’s true IR35 status.
In this article we look at the top 3 factors cited by industry experts for determining IR35 status. For quick reference we've also put together an overview infographic on this subject, available to download by clicking the banner below.
If you still require any further information or support around IR35 further to reading this article, contact us directly via email@example.com | +44 (0) 1202 979 700. You can also benefit from an extensive library of IR35 advice by visiting www.qdoscontractor.com/IR35
“...whether the public sector experience has truly woken the entire private sector up to the reality of blanket-inside IR35 decisions remains to be seen. It’s now down to these businesses to start their preparations immediately to ensure they are ready to administer the IR35 rules fairly and accurately well in advance of the roll-out of further changes.
[Definition: The degree to which a client controls, directs and supervises what, how, when and where an individual completes the contract and day-to-day work]
The big question here is, how much autonomy does a contractor ultimately have?
Typically, employees will operate within a managed or supervised environment. Work is seen as open-ended and ongoing, commonly taking place in clients offices or similar, with a defined start, end, and break times allocated. Many employees also receive company benefits such as sick pay, maternity or paternity pay, holidays, perks and incentives etc… working under the direction and control of their employer.
For contractors, the freedom to control projects completion is one of the most significant factors when determining IR35 status. To be outside of IR35 a contractor must be in control of all aspects of the project they’ve been hired to complete, with influence over how the work is achieved.
In IT contracting particularly, it’s vital that specific milestones and tasks be outlined to contractors by clients so as to avoid work being viewed as without-end. Additionally, the written contract must be without client clauses that indicate a right to control or supervise; at both the upper and lower tier contract levels.
Personal Service & Substitution
[Definition: An employee offers a personal service, whereas a genuine business or contractor should be able to deliver services to a client regardless of who provides them]
Working arrangements that sit outside IR35 often include a genuine right of substitution. Here the big question is - can another person be sent to a client in place of the original contractor, to carry out the required work?
Employees are seen by clients (and the HMRC) as people that provide their personal skills and capabilities to an employer, typically having been hired by the business specifically for these strengths. On the other hand a freelancer, contractor or business provides services to the client, and as such, should be able to exercise substitutions if required.
What’s important here is that the right to substitute be: demonstrated in the contractual agreement, genuine, and thought-out thoroughly in case it needs to be actioned. In IT contracting ‘unfettered’ rights to substitution (where a client is forced to accept a substitute) are rare, as often clients will veto substitutes not deemed to have equal training and qualifications.
Mutuality of Obligation
[Definition: A scenario where ongoing work is expected by both worker and/or employer]
The question to ask for mutual obligation - is the engager/client obliged to remunerate the worker, and the worker obliged to provide his/her skills?
As an employee, you expect to be given a never-ending supply of work, which of course an employer will require you to complete again-and-again. This may be a single contract of employment or regularly renewing short term contracts - either way, the workload is constant.
To be a freelancer that’s seen to be outside of IR35, work delivered needs to be completed on a one-off basis, working towards a defined project structure with set goals. There should be no expectations for further work from the client, and vice versa, the client should only expect the defined project to be completed.
As well as the three main IR35 status indicators, there are a number of other factors which can come into play to help give marginal cases more context. Remaining factors include;
- Is the equipment required to complete a project provided by the contractor/business or the client? Not just laptops, but mobile phones, cars, etc…
- Do financial risks associated with a project lie with the client or contractor? If responsibilities are with the freelancer business then this could support an outside IR35 status.
- How is an individual/business paid for their services? Per project and task, or on a fixed hourly/daily rate - as the latter can indicate employed status.
- Does the individual stand apart from the organisation or are they integrated within the client’s culture? - attending social events, internal meetings, accessing staff facilities, using benefits such as employee car parking etc…
- Is the contractor working for, and renewing exclusively with one client only? Or is the individual involved with multiple projects across multiple clients that are regularly influx?
- Is the individual behaving like a business or an employee? For example, do they market and advertise their services, do they have multiple income sources, is there a developed brand with a website, logos, custom documents etc, are they VAT and Data Protection Act registered, are they tendering for other projects, are they employing staff, and so-on.
For more information on IR35 and its impact on the private sector from next April get in touch via:
firstname.lastname@example.org | +44 (0) 1202 979 700
This article was written in collaboration with Qdos Contractor. For further info on IR35 in the private sector, also see: