As a contractor, one of your key priorities is to ensure that both the wording of your contracts and the way you work (your working practices) demonstrate that you’re working outside IR35.
In this article, we take a jargon-free look at the factors which are used to determine whether or not a contract is likely to fall within the IR35 trap
When you start a new IT contract, you need to make sure 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, you are not seen to be a “disguised employee” of your client.
This is the essence of IR35. The legislation was implemented in April 2000 to stop individuals from enjoying the tax benefits of working via their own company, despite working in the same way as a traditional employee, rather than a business owner.
The Off Payroll rules were implemented in 2017 (public sector bodies) and 2021 (most private sector companies). These changes mean that clients are in charge of determining whether or not a contractor is caught by IR35 or not.
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 – the big picture
When working out the employment status of a contractor, there are a number of important points to bear in mind before we look at the individual IR35 factors themselves:
- The contract between contractor and agent (known as the lower tier contract) must demonstrate that the contractor is working in the manner of a ‘self-employed’ person.
- The contract terms of the upper tier contract (between agent and client) should mirror those of the lower tier contract.
- The working practices of the contractor must also show that he/she is not merely a disguised employee.
- A confirmation of arrangements document provided by the client will go a long way to backing up any working practices claims.
- HMRC will look at the big picture of a contractor’s contract when carrying out an IR35 investigation.
When working out whether or not a contract for services is one of ‘self-employment’ or not, the following factors will be taken into account:
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. Substitution, Control and the Mutuality of Obligation are seen by employment status experts as the three most decisive when IR35 has been tested in the Courts.
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.
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.
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).
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, 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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