What must you consider when making IR35 decisions?
Even among experts, the IR35 legislation is seen as complex. With many different factors to consider when making an IR35 decision, setting the tax status of contractors isn’t always black and white. But this isn’t a recent development as a result of IR35 reform. Upon its arrival in 2000, this controversial tax was criticised for being needlessly complicated.
That said, following changes to IR35 in the public sector, the number of incorrect status decisions seems to have increased. To a point, this was to be expected, as the responsibility for administering the IR35 rules was passed from the worker to the end-client. From next April, this will also be the case in the private sector.
In short, contractors are worried that their clients do not have a firm enough understanding of IR35 to set their status correctly. These workers also fear that the companies they work with will focus on protecting their liability by placing them inside IR35 and not prioritise well-informed determinations.
Given that assessing IR35 status can be complicated and the financial consequences of making the wrong decision can be very damaging, we’ve outlined a number of the key points that should be assessed when deciding if a contractor belongs inside or outside IR35.
Does the contractor have autonomy over the way they deliver their services? Or do they fall under the direct control of the client? For a contract to be considered outside IR35, it’s important that the worker has the right to carry out their work in the way they see fit – or as much as it’s possible.
There are other aspects of Control to take into account, including start and finish times, where the contractor works from and whether or not they are managed in the way that an employee tends to be.
For contractors to work outside IR35, the service they provide must reflect that of a business to business engagement, not an employee to employer relationship.
Does the contractor have the right to provide a substitute, just as any other business providing a service to another company might? Or does the contractor carry out a personal service, just like an employee?
While substitution alone isn’t a determining factor with regards to IR35, many contracts that fall outside the scope of the legislation contain a clause on it. But it’s no good to simply add one into the written contract for the sake of it. Should the contract include the right to provide a substitute, the contractor must be genuinely able to exercise it.
Mutuality of Obligation (MoO)
This is the third of the so-called most important points to consider. Does a mutual obligation exist for the contractor accept paid for work and for the engager to offer it? Or is the working relationship a contract in the respect of having a start and end date with no further expectation of paid work?
It’s important that contracts deemed outside IR35 can show that Mutuality of Obligation (MoO) isn’t present. Outside IR35 engagements typically have set start and finish dates. In other words, they shouldn’t be rolling.
CEST (HMRC’s IR35 testing tool) makes the assumption that MoO exists in all contractor engagements. This has led IR35 specialists to criticise the technology, given it ultimately ignores one of the legislation’s most important aspects. Among sector experts, it’s also considered a reason not to rely solely on the taxman’s tool when making IR35 assessments.
In addition to these three key points above, there are a number of other things anyone setting IR35 status should think about. These include:
Does the contractor take on financial risk, in the way that any other business might when providing a service for another company? Given contractors operating outside IR35 should operate as a genuine business, by having insurance policies and being held liable for any mistakes made when carrying out the work is an indicator of a genuinely self-employed engagement.
Part and parcel
Does the contractor behave like they are ‘part and parcel’ of the client’s company? From an invitation to the Christmas party and other staff social events, to access to the staff car park, contractors considered outside the rules shouldn’t be entitled to the benefits that employees are able to enjoy.
Whether a contractor uses the client’s equipment or their own can also come into play should HMRC decide to launch an IR35 investigation. While it’s unlikely that an IR35 case would hinge on a contractor using a client’s computer to carry out the work rather than their own, for example, individuals working outside the legislation need to steer clear of anything that points towards the arrangement resembling a ‘contract of service.’
While IR35 status doesn’t rest on this, should a contractor be free to work simultaneously with other clients, it starts to paint a picture of an outside IR35 contract. That said, this is not considered a determining factor and an individual could still be placed inside the rules despite working with a number of other clients.
Any IR35 expert will tell you that status decisions shouldn’t be made by assessing one element of the legislation alone. Often, it takes a number of things to start to paint the picture of whether an engagement sits inside or outside the rules.