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Arguably, the IR35 legislation’s biggest downfall lies in its complexity. And given the boundaries between what constitutes as inside IR35 compared to outside are, on the face of it ambiguous, it’s increasingly difficult for private sector contractors and public sector engagers to make accurate and career defining employment status decisions alone.
The challenges and implications of setting an incorrect IR35 status means unbiased, independent advice is highly recommended. When assessing a contractor’s working arrangement there are three key areas which experts will review in order to make an informed decision.
Is the working arrangement a personal one, or does the contractor have the right to provide a substitution? From HMRC’s standpoint, an employee offers a personal service, whereas a genuine business or contractor should be able to deliver services to a client regardless of who provides them. Working arrangements which sit outside IR35 often include a genuine right of substitution.
In employment law, Mutuality of Obligation (MOO) focuses on whether there is an obligation from the client to provide consistent and paid work, along with an obligation from a worker to personally carry out this work.
Genuine self-employed contractors and IR35 friendly contracts should not fall under Mutuality of Obligation. In HMRC’s eyes, a contract which sits outside IR35 should include start and finish dates and not be ‘rolling’. In other words, the contract should state that the work is a one-off project and not an ongoing contract of employment. There should also be a lack of MOO during the contract, such as no obligation to offer or accept work during periods of shut down for the client, where contractors are sent home without pay – as in the Marlen (2011) case.
Whether a contractor has control over how they carry out their work is one of the most significant factors when determining IR35 status. Falling under Supervision, Direction or Control (SDC) suggests that the working arrangement could be inside IR35. If a client dictates what, when, where and how the work is carried out, there’s a chance the contract will fall under SDC.
Written contracts might not give much indication of control, so it’s vital that the contractor and the client both agree whether the working arrangement does fall under SDC, and make it apparent when setting employment status.
As well as the three main IR35 status indicators, there are a number of other factors which can come into play to help give marginal cases more context.
While the provision of certain vital client equipment is a given, using client laptops, mobile phones and cars, suggests that a working arrangement is perhaps more suited to that of an employee.
For a contractor’s working arrangement to fall outside IR35, it’s important they operate just like any other business. And this includes having a business presence. Insurance, a company website, letterheads, business cards, a registered office address, legal structure and VAT registration could indicate to HMRC that a contractor is genuinely self-employed, and not working through a PSC simply to avoid paying employee taxes.
Working on a number of different contracts at the same time indicates that a contractor is less likely to be working in an employee-like arrangement, and therefore outside IR35.
Ambiguous as it might be, the level at which contractors integrate with clients can be an indication of their IR35 status. From how employees in the organisation perceive the working arrangement, to making use of the employee car-park or attending office parties, to sit outside IR35, differences between the contractor and the employee must exist.
When a contractor is paid by the hour, day or week, this might suggest that the working arrangement has similarities to employment, compared to say a fixed project fee, which is an obvious indicator of self-employment.
There are a range of potentially confusing and contradictory factors to consider when it comes to employment status, which highlights the need for expert opinion, IR35 insurance, not to mention the importance of keeping hold of any evidence which might assist in the event of an IR35 investigation. For more detailed information on the above key status indicators, take a look at our IR35 compliance guide.
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