In order to be compliant with the IR35 legislation, contractors need to ensure that their contracts and working practices show that they are outside the tax rules.
In this article, we take a jargon-free look at the factors which are used to determine whether or not a contractor is likely to fall under the IR35 rules.
When entering into a new IT contract, you need to ensure that the terms of the contract, as well as the way you actually carry out your duties, show that you are compliant with the IR35 rules – in other words, that you are not seen to be “employees” of your client.
The IR35 rules are applied to individual contracts – not to the person performing them. Therefore, a contractor may perform two contracts in a given year – one may be subject to IR35, and the other may not.
The most important thing you can do is to have your contracts reviewed by IR35 experts before entering a contract, as the financial cost of falling under the IR35 rules is considerable.
IR35 Compliance – Key Factors
In the event that your IR35 status is challenged, HMRC will look at a number of factors to determine whether or not your contract falls within the IR35 rules. Some factors are more important than others (recently the PCG highlighted the particular relevance of Substitution, Control and the Mutuality of Obligation).
In addition, decisions made in previous IR35 legal cases may be used in determining whether a contract is caught by the rules.
Not only should the wording of your contract be compliant with the IR35 legislation, but it should also reflect the way you actually carry out your duties (your “working practices”).
An important IR35 factor, you should ensure that your contract allows you to provide a substitute in the event that you are unable to work at your client site due to illness or other eventuality. The right to substitution must always be a genuine one, with any costs of providing the substitute met by your own company.
Another important factor, your contract and working practices should indicate that you do not perform your duties in a manner akin to a normal “employee”. For example, it would be beneficial if you don’t have fixed working hours and have some power over when and where services are provided. You would not expect to receive a great deal of supervision as this is a strong indicator of “employee” status. Read more in our guide to control and IR35.
Provision of Equipment
Whereas employees are provided with equipment by their employer, a “self-employed contractor” would expect to provide his/her own equipment.
Employees typically do not risk their own funds when working on a project, whereas “self-employed” people almost certainly do (e.g. they pay for training, equipment, running costs, and materials).
Financial risk could also take the form of quoting a fixed price for a contract, with the consequent risk of bearing the additional costs if the job overruns. If you have a fixed monthly income, this may be an indicator of “employment”.
Basis of Payment
Although a regular payment cycle is seen as an indicator of “employment” (i.e. daily, weekly, monthly), this test is seen by experts as being inconclusive, as HMRC’s own Schedule E Manual states that a self-employed person can also be paid by the hour/day, etc.
Part & Parcel
After some time on a project, some contractors may feel as if they are gradually becoming “part and parcel” of their client’s organisation – this is something you should try to steer clear of. Examples of this factor would include: Attending staff meetings (which don’t relate to your contract work), using “staff facilities” such as the subsidised canteen or gym, and being managed by permanent staff (or managing permanent staff).
Mutuality of Obligation
A service company will expect to sign a contract to provide a fixed amount of work, invoice the client, and get paid for the work. If continuous work is offered by the client, this is another strong indicator of “employment”, as it implies that the contractor expects to be provided with future work. Read more about MOO in our dedicated article.
Alongside the factors listed above, there may be factors personal to the contractor which may influence whether or not his/her contract falls under the IR35 rules. Some potential indicators of “self-employment” include professional indemnity insurance cover, company stationery, a company website and VAT registration.
You should remember that it is the overall picture of your contract and working practices which will determine whether or not you will be caught by IR35. You should always consult an expert before signing any contract.
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