iDelete Ltd -
IR35 is tax legislation designed to tax "disguised employment" at a rate similar to employment. In this context, "disguised employees" means workers who receive payments from a client via an intermediary and whose relationship with their client is such that had they been paid directly they would be employees of the client.
An employee would leave his employment on a Friday afternoon and return to work the following Monday to do the same job but not as an employee of the original employer. Instead he would be employed by an intermediary (a personal service company of which he would be a controlling shareholder/director) through which his services would be supplied to the original employer. The intermediary would invoice the original employer for these services and would receive a gross payment.
Through coming to the above arrangement the original employer would avoid paying
Class 1 NIC at 13.8% and the (former) employee could arrange his payments between
salary and dividends in order to minimise his tax and NI liabilities. The government,
therefore, introduced anti-
The IR35 legislation applies to individuals who provide their services through an intermediary (usually a personal service company) where the income received for performing the services would have been treated as employment income had the individual contracted directly with the customer (without the intermediary). The tests used in deciding if somebody is employed or self employed are therefore be used in deciding whether an engagement is caught or exempt from the IR35 Legislation.
There is no straightforward way to determine whether a IR35 should apply to a worker as there is no distinction between a contract of service (employee) and a contract for service (self employed) in statute – we therefore rely on common law principles (past judgements) to establish the factors which are relevant.
These factors are applied to both the contract under which the services are provided as well as the working practises of the contractor. The main areas looked at include, but are not limited to:
The amount of direction and control by the end client must be considered. It is not necessary to prove that the person carrying out the work is doing so under very detailed supervision because even professional persons can be operating under a general and overall framework of control from the end client.
a) What is done – if a client can move the contractor to different areas of higher priorities then this will be an indicator of employment.
b) When it is done – control over when the work is done may be an indicator of employment.
c) Where it is done – when the contractor is required to work at the client’s premises this can be an indicator of control, although if the work can only be done at the client premises, this may not be a factor.
d) How it is done – this is a strong indicator of employment; it permits the client
to prescribe the way in which the work is to be carried out. However, the absence
of this level of control does not necessarily indicate self-
Pointer – ideally the contract should clearly state that the client has no right to direction, control, supervision etc. The contract can state that the client can make sensible requests but the contractor has no obligation to agree to them.
Personal service is an essential element of a contract of employment. A person who has the freedom to choose whether to do the task themselves or hire somebody else to do it (on a reasonably unfettered basis) for them, is probably self employed.
Pointer – a right of substitution written into all contracts in the chain is probably essential. The contract should state that the contractor is responsible for the completion of the services but should enable a right to use a suitably qualified person to provide the service if necessary. A clause to allow the client to be reasonably satisfied that the substitute has sufficient skills, is acceptable.
Mutuality of Obligation would normally appear in all contracts, i.e. an obligation on each party to provide something.
The internal guides for HMRC staff suggest that they ignore this test when considering the IR35 status of a contract. This is quite a complex test but a Judge was critical of the HMRC’s instruction to ignore it. This tests if any obligation exists between the client and the contractor. The expectation for continuous work to be provided to a person and the expectation for all work provided to be completed characterises an employment relationship. If therefore there is a clause contained in a contract setting out an obligation for the client to offer further work and for the contractor to accept it, there would be a mutuality of obligation in the contract and
it would be caught by the IR35 legislation. ‘Rolling contracts’ or indeed contracts that are continually renewed could therefore fail this test. If the client simply pays the contractor or agency for services then it may be that MoO does not exist and so this is not an “employment” situation.
Pointer – A self-
A contractor engaged to undertake a specific piece of work using their own tools
and equipment will be a pointer to self-
Pointer – the contract should not state that the client will provide basic equipment or cover training costs. The client provision of specialised equipment is acceptable.
An individual who risks their own money, such as buying assets, bearing running costs
and paying for overheads, will be self-
Pointer – working for a fixed price, agreeing to correct defective work (at your cost), providing your own insurance cover will support a case for self employment.
Employees tend to be paid by fixed rates, paid weekly, monthly etc. and may also
be paid for overtime. Self-
Pointer – if you cannot charge a fixed price, try to issue your own invoice rather than relying on timesheets, steer away from using terms such as “overtime” and try to get any expenses included in the rate. If you must charge for expenses, include on the invoice and do not use the client’s claim forms.
Long periods working for one client may be typical of an employment but not conclusive.
Regular working for the same client may also indicate that there is a single and
continuing contract of employment. A period of notice in the contract is more typical
of employment contracts, so an absence of a notice period would point towards self-
Pointer – ensure that the contract does not contain any clauses that prevent you from working for other clients at the same time. The contract should be able to be terminated early with a notice period of no more than one month.
To show if a person carries out business on their own account, it is necessary to take account of all aspects of the business from an overall view. If the business looks like a real business this will strengthen your case.
Pointer – aspects that would help towards showing that you are a genuine business include, having business insurance, equipment, more than one client at a time, business telephone, stationery, other sources of income etc.
The contractor should not be seen to be an integrated part of the organisation as
this can weaken the case for self-
Pointer – the contract should not cover areas seen in employment contracts such as reviews and disciplinary procedures.