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Contractors, such as interim managers, who are personally appointed as ‘office holders’, i.e. those who take on management roles in their client’s business, must apply IR35 for tax purposes. HMRC defines an office holder as someone who holds a “permanent, substantive position which had an existence independent from the person who filled it, which went on and was filled in succession by successive holders.”

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Job title alone will not determine a worker as an ‘office holder’ if the worker does not undertake the duties of an office holder.

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Click here for more information on office holders.

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A self-employed contractor enters into a contract to provide a service rather than personal skills and should be able to provide a substitute or engage a helper to provide the service. An employee on the other hand, would have to provide their services personally.

The right of substitution has been considered one of the strongest tests of self-employment since the case of Chaplin v Australian Mutual Provident (1978) which held that “…the power of unlimited delegation is almost conclusive against the contract being a contract of service.” This was upheld in the case of Echo and Express Publications v Tanton (1999).

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Many contractors will argue that they never need to engage a substitute, perhaps because they never need one or because they do not know other contractors with the relevant skills to appoint, even if the need arose. Regardless if this is the case, HMRC will look to draw a ‘hypothetical contract’ and so it is vital that although the majority of contractors may never exercise it, the right to substitute someone else to undertake the work must be a genuine one. The substitute must be answerable to, and paid by, the company who originally undertook to complete the contract. Written confirmation from your end client would be valuable in an enquiry.

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The client may retain the right to veto a substitution on reasonable grounds, however this should be limited to factors such as the qualifications/experience of the proposed substitute, or security issues.

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Find out more about this test.

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The degree of control exercised by the client over the services to be completed, as well as how, when, and where the individual does the work is highly important.

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It is essential to demonstrate that the client has engaged the services of the contractor to provide a specialist service and that you have autonomy over the way the services are provided. To use an analogy that is often used; should you need the services of a plumber, you will contact the plumber, show the plumber what needs to be fixed, then the plumber is left to carry out the services using their own working methods. This is how the relationship between the contractor and the end client should be.

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A self-employed individual may agree to perform a particular task at a specific time and place, but it is unlikely that they will be subject to any right of control by the client.  An employee on the other hand, is likely to be told where and when the tasks should be undertaken.  This is shown in the case of Morren v Swinton and Pendlebury Borough Council (1965).

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This being said, for control to be relevant, it must be much more than merely monitoring or checking work.  Unless a contractor is “tied hand and foot” to the client, then the detrimental level of control is not present [Chaplin v Australian Mutual Provident].

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What

Control over what the contractor does will be clear, as he will be constantly advised by a manager or supervisor as to the work to be done.  Where a client can move the contractor from job to job due to the changing priorities, there will be a right of control over what is to be done – this is a strong indicator of employment. [Stagecraft Ltd v Minister of National Insurance (1965)]

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Where

Control over where the contractor does the work may be in the contract.  A contract of service will usually provide the client with the right to require a contractor to work at a specific place.  Where the tasks are to be undertaken at the client’s premises and the work to be integrated into the client’s premises, there is likely to be control.  It is acknowledged, however, that certain services can, in reality, only be carried out at the client’s premises therefore this factor may be neutral.

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When

Control over when the contractor does the work is obvious; an employee would be required to work set hours. A self-employed contractor would be expected to arrange their hours to suit the task and their own convenience.

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How

Control over how the tasks are completed can be difficult.  In the case of Morren v Swinton Borough Council, it was said:

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“Clearly superintendence and control cannot be the decisive test when one is dealing with a professional man or man of some particular skill and experience.  Instances of that have been given in the form of a master of a ship, an engine driver or a professional architect or, as in this case, a consulting engineer.  In such cases, there can be no question of the employer telling him how to do the work, therefore the absence of control and direction in that sense can be of little, if any, use as a test.”

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However, in reality, contractors with specialist skills and expertise will be likely to work with clients who have their own knowledge of these specialist areas.  As such it is important that contractors retain a reasonable degree of autonomy over their working methods.

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It should be remembered that the control need not be exercised directly, but that it can be delegated as was the case in Global Planet v The Secretary of State for Social Security.

Find out more.

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An employer will try to make sure that their employees have a continuous supply of work and will also expect the employees to carry out the work when they require. A self-employed individual will do the work they are being contracted to do and will finish with no expectation of further work.

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Although mutuality of obligation is a key determining factor surrounding IR35, it is worth noting that HMRC’s lack of understanding and misinterpretation makes it difficult to mount a successful defence on this test alone. Additionally Judge Howard Nowlan in the 2011 UKFTT case of JLJ Services Ltd v HMRC stated,

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“There is considerable case law in relation to this test, progressively indicating that the test is of diminished importance, or that it is indeed meaningless....................A touchstone of being an employee is the hope and expectation that there will be some relationship of faithfulness between employer and employee. In other words, the employer will generally endeavour to keep staff employed when work is short.”

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Currently, much focus is being placed on non-mutuality of obligation during the contractual term and, as such, it is important that a contractor has the right to walk away from a contract early, if they so choose.  Also see Right of Dismissal.

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If no clear end date is included in the agreement, and there is no explicit non-mutuality of obligation clause, the contract could fail an assessment, however it would be necessary to look at the other positive elements of the contract.  If there is no end date, it may be appropriate for certain contracts to terminate upon the completion of the services – this would be acceptable in cases where the contract is based on clear deliverables.

See the Resources section for example clauses for this test.

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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.

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Examples of financial risk are as follows:-

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• The provision of your own equipment, office facilities, manuals and training.
• Having to indemnify the client against losses or damages due to your negligent acts or omissions.
• Being obliged to correct defective work at your own cost.
• Having to provide your own insurance cover, e.g., Professional Indemnity, Public Liability and Employer's Liability.

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.

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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].

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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.

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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.

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​Find out more about financial risk.

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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.

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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.

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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.

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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.

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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.

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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)]’.

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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.

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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’.

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