How to assess IR35 status under the off-payroll working rules
Contractors continue to play a key role in the flexible working economy despite the introduction of the off-payroll working rules in 2017 and 2021 which handed the responsibility of determining employment status for tax (IR35 status) to the hiring organisation.
If you’re just becoming a medium or large private sector business or hiring contractors for the first time, we explain how to assess the IR35 status of these workers.
Not sure what the off-payroll working rules are? Click here
The IR35 status of a contractor will either be employed for tax purposes (inside IR35) or self-employed for tax purposes (outside IR35).
If the contractor is considered inside IR35, they would need to pay the relevant tax and NI like that of an employee, whilst a contractor who is outside IR35 would be able to use the relevant tax efficiencies of a bona fide business.
A contractor isn’t fixed into one status; it can change with the circumstances of each engagement, and even within the same one.
You must assess the status of each worker. Ideally, you should also undertake a role assessment (an indicative assessment based on the role alone) prior to hiring so the role can be advertised with the result and you can attract the best talent with your outside-IR35 roles.
How to assess IR35 status
IR35 status is determined by a range of factors or tests based on the judgments made in historic tribunal cases. The key three status tests are:
- Right of substitution/personal service
This test considers that a business-to-business relationship isn’t reliant on the personal service of a specific worker, whilst an employee is personally required.
You will need to know whether you would accept an equally suited substitute from the same limited company or if it’s the specific worker you require when hiring.
- Right of control
This test considers that a business providing services to another would have the relative autonomy to decide how the work should be completed based on their hired expertise. They would also be able to deliver the services to the contracted deadlines with reasonable flexibility in when and where they are delivered in the interim. In other words, an employee will have set hours and place of work, and be told what to do, whilst a business would not.
You should be clear on why and how you are expecting the contractor to fill the role. Are you engaging a contractor to provide their services or simply filling a resource gap?
- Mutuality of obligations (MoO)
This test considers that a business would be contracted for a set period or clear set of deliverables, and both parties would be able to terminate the contract, whilst an employee would be provided with a continuous supply of work and subject to a notice period.
Will there be set deliverables that will end the contract once completed or do you expect to simply move the contractor to another task without a change in contract?
To accurately determine status, you should also consider:
- Financial risk
Businesses take a financial risk to run in the form of owning equipment, indemnifying the client against faulty work, and having suitable insurance. These trappings of a business are an important part of establishing whether a contractor is operating as a genuine business or more like an employee who would be covered for all of these things by their employer.
- Part and parcel
As the saying goes; “if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” This test considers how embedded a contractor is in your organisation, such as if they’re identifiable from employees, subject to performance reviews, or given employment benefits.
Accurate IR35 determinations are made by considering all
the circumstances to form a complete picture of the relationship. This is called the hypothetical contract i.e., if there were no intermediaries between client and worker, does the worker appear like an employee or more like a service provider? Each test will point to one or the other, but they’re not all equal. For example, the right of substitution holds far greater weight than the part and parcel test.
Using an IR35 tool
There are a range of tools available to make assessing status a breeze, including our own Qdos Status Review
which involves the contractor in the process and includes an expert IR35 consultant to review each case.
Qdos Status Review asks 40+ questions covering all of the above status tests and provides free-text fields for added context and explanation, allowing our expert IR35 team to provide a determination every time.
HMRC released its Check Employment Status for Tax (CEST)
tool ahead of the public sector rules in 2017. As HMRC’s own tool, which is free for anyone to use, it has understandably been very popular for engagers getting to grips with assessing status.
Unfortunately, it has been deemed “not fit for purpose” in a report by the House of Lords and only provides a result in 79% of cases. Please note that HMRC’s CEST tool also doesn’t answer any questions based on the test of Mutuality of Obligations. You can find out more about why that is here
If using HMRC’s CEST tool, we recommend not using it in isolation. You should also be familiar with the CEST section of the Employment Status Manual (ESM)
to ensure you’re answering all questions as intended.
Changes to IR35 status in 2024
The three key status tests used to determine IR35 were established in the case of Ready Mixed Concrete (Southeast) Ltd V Minister of Pensions and National Insurance 1968, and cases since have predominantly continued with these tests as the basis of a decision.
A case involving Professional Game Match Officials Limited (PGMOL)
, which hinges on the tests of MoO and Control, has recently been heard at the Supreme Court of which we can expect the results at any time. Because this has reached the Supreme Court, the results of this case would become case law and thus could change how status is determined in the future.
We will keep you updated with any future developments, but as for now, the basis for determining IR35 status remains the same.