IR35 is a legislation designed to stop workers incorrectly claiming to be contractors, rather than employees, for tax benefits. Contractors and freelancers need to make sure that they are IR35 compliant.
There is no definitive rule in respect of IR35 and if contractors/freelancers can justify their position, they shouldn’t be placed on payroll as an employee.
Long-term contractors and freelancers who work through a limited company will need to ensure their contracts accurately reflect the relationship with their clients. Contracts will need to be checked for each project on renewal and must provide clear evidence to support the contractor’s/freelancer’s status as a self-employed professional rather than an employee.
HMRC investigations are not confined to the detail contained in an individual contract and will ‘look beyond’ the contract to examine the actual working practices between contractors and their clients. If HMRC decides the relationship is of an employment nature, they will seek to recover all income tax and National Insurance contributions due over the period of the contract affected.
There are 3 main areas to look at when determining IR35 status:
Supervision, direction and control of the worker
Right of substitution
Mutuality of obligation
Without the presence of all three, there can be no contract of service and there contractor is therefore not subject to the IR35 rules.
We go into more detail on these below.
Supervision, direction and control of the worker
In short, this looks at what degree of supervision, direction and control a client has over a contractor in respect of what, how, where and when they complete their work/contract.
Supervision, Direction, and Control are tests of ‘employment’ that could put a contract inside IR35.
Supervision means the extent to which the client oversees the contractor’s work.
Direction means the client directing how the contractor completes the project or assignment, by providing instructions, guidance, and advice as to how the work is to be done. Someone providing direction will often coordinate how the work is done as it progresses.
Control is where the client controls the work the contractor does and how they do it. This also includes the power to move the contractor from one task to another.
Contractors and freelancers should have control over when and how they work, not the client. Having a project basis to the work performed is a crucial indicator of IR35 status.
Right of substitution
If a contractor can send a substitute in their place, rather than having to do the work themselves, then this is an indicator of a genuine contractor relationship, rather than an employee-employer relationship.
If a client, however, is only interested in a particular person’s skillset etc., and no substitute can be sent, this would be an indicator of an employment relationship.
Mutuality of obligation
On order to be a contractor, there must not be a mutuality of obligation, where there is an obligation for the client to offer work and also an obligation for the contractor to accept it.
In other words, a contractor would work on a project-to-project basis with no obligation to carry on working for the client once that work has been completed. An employee on the other hand, would need to be handed work to do, and would need to continue to do such work even after specific projects have been completed.
Though not conclusive, if a contractor is allowed to work for a number of clients at the same time, this would be an indicator of a genuine contractor relationship, rather than one of an employee who can often only work for one company.
A contract that would be IR35 compliant would state that the client does not have an obligation to offer the contractor more work and that the contractor doesn’t have an obligation to do that work. On the other hand, if a contract states some form of exclusivity, a number of working hours or pattern, or any reference to an ongoing basis of working, this would be indicative of an employment relationship and not IR35 compliant.
Other factors
In addition to the 3 areas covered above, we outline a few further considerations:
Financial risk – Regular work and regular payment are indicative of employment. Any errors made by the contractor should be rectified in the contractor’s own time, and they should have their own professional indemnity insurance if they are to be viewed as a contractor
Use of own equipment – Contractors should use their own equipment rather than equipment supplied by their client, unless there is a valid reason such as safety or practicality.
Employment benefits – If a contractor is entitled to holiday pay, sick pay, pension, this is all indicative of employment.
Corporate involvement and being part and parcel of an organisation – If a contractor has any corporate involvement with the client (even for small things such as having a security pass), this could have an impact on IR35 compliance. If a contractor becomes embedded in their client’s organisation, such as having staff reporting to them, this would be indicative of an employment too.
Being in business on your own account – If a contractor can demonstrate they are in business on their own account (such as having their own office, business stationery, a website, other clients, advertising, invoicing etc.), this will be indicative of a contractor.
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Please note that the above provides an introduction and an outline to IR35 and is not exhaustive; you should seek professional advice on whether IR35 applies to you.
Please contact us to find out how the above applies in your circumstances.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
