Despite changes to the administration of IR35 from April 2021, the way in which it is determined remains the same.
Below we explain the main status tests that need to be considered to assess IR35, how to comply with the legislation and why. (Please note that this is only a brief guide; it is not intended to be a comprehensive analysis of employment status).
If you have any queries regarding IR35 or the below IR35 compliance guide, please do not hesitate to contact our consultancy department on 0116 2690 992 or [email protected]
The party responsible for IR35 compliance depends on when and with who you are contracting. Since 2000 when the legislation was introduced, it was the sole responsibility of the contractor, however, due to IR35 reform in both 2017 and 2021, this is now not always the case.
You are providing services to a client in the public sector
You are providing services to a client in the private sector which is classed as a medium or large company under the Companies Act 2006 from 6th April 2021
Whether or not an individual is really in business on their own account is the most relevant test of all. A self-employed individual is responsible for how their business is run. Unlike an employee, they provide their own equipment, hire their own helpers, take responsibility for investment in management and have the opportunity of profiting from sound management in the performance of their task, and generally take a financial risk in operating.
Examples of financial risk are as follows:-
Other matters such as VAT registration, health and safety requirements, licences, advertising, etc. should be taken into account and help to demonstrate being in business on your own account. A limited company contractor should have all the normal trappings of a legitimate business in place.
Whether equipment and other facilities are provided by the individual can also be important. An employee will have all the necessary major items of equipment and facilities provided by their employer. The self-employed will generally provide their own equipment as shown in the case of Ready Mixed Concrete (South East) v The Ministry of Pensions and National Insurance (1968].
The more essential the equipment is to the work, the more important this factor becomes, i.e. a milk man who does not own his own float will not normally be accepted as self-employed.
HMRC will also take into account investments in skill, i.e. training.
If a contract contains clauses that stipulate the client will purchase any training or equipment (other than particularly specialised equipment) on behalf of the supplier, it is likely to fail an assessment.
Find out more about financial risk.
Contractors must not be ‘part and parcel’ of the client’s business as if they were one of their employees. They should not be on any internal lists of employees or have business cards showing their client’s name and, crucially, must not be entitled to any benefits offered to the client’s own staff, i.e. bonuses, pensions, and use of facilities such as a gym.
Any clauses that stipulate that a contractor will be subject to performance reviews or disciplinary action (as would be expected of employees) would cause a contract to fail an assessment.
It is not normally the case that a self-employed person could be dismissed other than if they were in breach of the terms of their contract. HMRC see notice periods as being indicative of employment however reasonable notice periods are considered defendable.
A better indication of genuine self-employment would be to not have a notice period, but rather both parties be able to terminate with immediate effect. Although realistically this will be impractical for most commercial agreements. Although a lack of mutuality of obligation is a pointer towards a contract for services, this issue does not carry as much weight as it used to and in the case of McManus v Griffiths, Mr Justice Lightman said in relation to a three-month notice period, "I do not think it is indicative of either. I regard the provision as neutral".
Also see Mutuality of Obligation.
When an individual works exclusively for one client, there is a presumption that they are an employee, as it is usual for a self-employed person to work for more than one person. HMRC do not see this as important; their view seems to be that most employees are not restricted to working for one employer. Contractors must have the right, however, to take on additional clients on a concurrent basis.
In Tax Bulletin 28, HMRC do concede that ‘long periods working for one client may be typical of employment, but are not conclusive’. The article then goes on to say that ‘regularly working for the same client may indicate that there is a single and continuing contract of employment [Nethermore (St Neots) Ltd v Gardiner (1984)]’.
If a contract explicitly states that the supplier is not able to supply their services to other clients this could cause a contract to fail an assessment, although it would again depend on the other positive elements of the contract. It is acceptable for clauses to be included that prevent the contractor from working with the clients direct competitors, or where other conflict of interests exists.
Also see Right of Substitution/Personal Service & Mutuality of Obligation.
This is seen as a ‘tie breaker’ issue – if a contractor’s status is unclear after consideration of the other issues surrounding IR35, the intended relationship of the parties can be used to determine the outcome of an enquiry. This test looks to differentiate the type of contract undertaken; a self-employed person works under a ‘contract for services’ and an employee under a ‘contract of service’.
When it comes to complying with the IR35 legislation, you should consider the following steps:
Since April 2021, whilst it might no longer always be the contractor’s responsibility to determine their IR35 status, contractors should still be focusing on ensuring compliance within their engagements.
It is important to remember that the reform does not apply to any engagements with companies classed as small as per the Companies Act 2006 and contractors are still liable for any services provided prior to April 2021. See above for more information on who is responsible for IR35 compliance.
An IR35 enquiry from HMRC will always begin with a request for copies of your written contracts relating to the accounting period in question, with proof of why you consider it to be outside of IR35. A robust contract may stop a full-blown investigation in its tracks, so it is essential to ensure compliance in this respect. A variety of status tests, outlined in this guide, are used to assess your contract, with no single test putting you inside or outside the legislation. Both the contract and working practices will require assessment as a whole using all of the status tests to determine your employment status.
The contract does not need to be in writing - an oral or implied contract is legally binding if the parties intend it. The terms of the contract can be collected from the circumstances surrounding the engagement.
It is not only your contract with a recruitment agency which may be assessed; in Usetech Ltd v Young the High Court decision made it clear that the "upper level" contract between the agency and the end client was to be considered in deciding the status of the worker, notwithstanding the terms of the agency's contract with the worker's Personal Service Company. Most contractors, however, will never see the upper level contract or have any rights to.
HMRC will look to see if you have taken ‘reasonable steps’ to ascertain your status and so it is imperative to have each contract reviewed in order to display this. View our contract review services here.
Having your contract reviewed by an independent third-party expert, will give you a better idea of where your engagement sits in regard to IR35 status. While such a review gives you the IR35 status of that contract, however, in order to find out the overall IR35 status of the engagement you will also need to undertake a review of the working practices of that engagement.
The working practices of an engagement is how those services are provided in reality.
The written contract between the contractor and the end client could be perfect in terms of IR35, demonstrating key areas such as substitution, control, non-exclusivity and mutuality of obligation but this will also need to be proven in practice. Although the written contract remains important in determining status, should you be unfortunate enough to be subject to an IR35 enquiry, HMRC will look closely into your working relationship with your client.
In an ideal world, we would like an IR35 friendly contract mirrored by the working relationship with the client.
If you are subject to a status enquiry by HM Revenue & Customs, the Status Inspector will normally want to obtain information from both you and the end client about the practical working arrangements of each engagement. This is known as constructing the "hypothetical contract" between the worker and the client. It is vital therefore that there is a clear understanding between you and the client about the nature of your day-to-day working relationship. This will also apply to situations where there is no written contract.
We offer services for assessing your working practices, including a Working Practices Assessment and a free Confirmation of Arrangements document which can both be assessed by our consultancy team.
Non-compliance with IR35 could leave you with not only the weighty cost of defending yourself against an enquiry from HMRC but also the potential burden of being saddled with the cost of any unpaid taxes should you be caught by the legislation.
Anyone can be investigated by HMRC, and should you be found to be inside IR35 but have paid tax as an outside IR35 contractor, you will be required to pay back the tax, interest and potential penalties as a result.
You should also bear in mind that an enquiry from HMRC is by no means a walk in the park, not only can these proceedings be extremely stress-inducing but they also have the potential to go on for a long time. The cost of defending yourself from an IR35 enquiry can very swiftly mount up if you don't have an insurance policy.
For services provided under the off-payroll working rules (i.e. in the public sector since 6th April 2017, or to a medium-large private sector business since 6th April 2021), you will not hold any liability as the contractor and it will be your client of fee-payer who will be subject to such an investigation in relation to these services.
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