Determining your IR35 Status
Part 4: What factors affect your IR35 status? The good news is - there's not one thing that is taking into account, but a number of factors.
In this series so far, we have the regulations, who it affects and why it’s important to take notice of the changes. In this section we’re going to explore the factors that might determine an IR35 status in more detail.
Personal Service and Substitution
Our contracts largely take on one of two forms. A ‘contract of service’ and a ‘contract for services’. Although there’s a tiny word difference here, the impact is huge.
A ‘contract of service’ is a personal contract promising the offer of an individual to perform a range of services for the employer. This is a typical employment type scenario where a contract is between employer and employee detailing a job role. It is not a contract that names the person performing the work and is often based on hours worked. This type of contract will be found to be ‘inside’ IR35. Since this is a usually a personal contract, it would therefore be unlikely that the work could be delegated to someone else by way of substitution of the individual.
A ‘contract for services’ is more akin to a business-to-business relationship. The services are defined, as are expected deliverables, timescales etc. The work being paid for is for ‘work done’, not for hours worked. More importantly, the work could be done by anyone working for the contracted party, but by a specified individual. Although not enough by itself, this type of contract would lean towards the ‘outside’ IR35 assessment. Substitution allowances in these contracts would support that it is not an individual that has been contracted, but that of the contractors’ business. If they found themselves unable to do the work, they would have the right to substitute themselves for another party. This is a cost of the contractor’s, not the hiring company. The hiring company should not be able to refuse the substitution.
Employment contracts (inside IR35) tend to dictate a worker’s hours, place of work, how they work, who they report to and what they should do. This are seen as controls over a worker. If a worker is controlled, then they fall inside IR35. Some of these elements are unavoidable for certain roles, such as being able to work the same hours as other key personnel, or only being able to work onsite due to the thing being worked on.
To be determined as outside IR35, workers need to be able to decide how they work, when they work, where they work. Contractors are often hired because of their specialist knowledge or skill, therefore this could be relatively easy to put in place.
In practical terms, there are also a few other elements to be aware of. It’s not simply enough to put these rules on paper, they need to be actioned in reality too. To be outside IR35, a worker cannot be asked to do something that is not in their contract. Contracts therefore are limited to a particular project - and should end once that project is delivered.
Mutuality of Obligation (MOO)
In an employment scenario, the employer is required to provide work for the employee, the employee is required to do the work and the employer is required to make the agreed payments for the work. If there is no work and the employee still showed up, the employer still has to pay. If the work is made available, the employee has to to turn up. Both parties have a requirement or obligation to provide work and payment or do the work itself. Payment is not just in the form of money either; it should also include all the usual employment rights we have mentioned before.
In a contracting situation, the hiring company has no obligation to provide work for a project, and the contractor has no obligation to do any of the work. The result here if neither party either provides work or does the work is simply no payment. This offers both parties complete flexibility and compliments some other factors such as financial risk and control.
Part and Parcel
When a contractor joins a team and in practice begins to act just like any other staff member, they become ‘part and parcel’ of a company and therefore become deemed as staff/employees. Things like having office keys, joining staff parties, having appraisals, being included in company phone directories etc. Some of these items do indeed make the job easier for the contractor, but when considering the off-payroll regulations and the need for regular assessment of and IR35 status, these things should not be overlooked.
Employees bear very little in the way of financial risk when it comes to their contracts. If a project is terminated early, the employee is likely reassigned to a new project. In order to be paid, they just need to accept a payslip and provide bank details. For contractors however, there is a much greater financial risk at play. If a project is terminated early, they are likely to lose their work and income. Contractors have to negotiate fees and raise invoices. They might overrun on a project, which costs them money, or finish early which means they can profit. They also carry the risk of a bad debt (non-payment). Due to these differences, they play a key part in assessing whether or not a contract falls inside IR35. If there is too much protection on the contractor, it’s likely that they become a deemed employee.
In business on your own account (IBOYOA)
Simply having their own limited company could be mistaken to be enough to evidence that a contractor is IBOYOA. However, a contractor needs to evidence a bit more than just a company number. Things like marketing, their own website, insurance, proposals and evidence of fee negotiation all help support that a contractor is genuinely IBOYOA. Without this, why would someone have a company unless it was just for the tax benefits?
Company names mean give away problems in this area. For example, if a contractor calls their company after their own name, it could be said that they are only offering their services - and therefore could be an employee rather than in business.
Investment into their own company can help - ie, buying equipment, furniture, training etc
Having multiple and concurrent clients strengthens the IBOYOA argument, but the work needs to be of a fair split and be similar otherwise it might not be enough to suggest they’re really concurrent.
Provision of equipment
Using your own equipment (laptop for example) rather than a company one is a minor factor when assessing your status. But as a rule of thumb, if you provide your own equipment, you have been seen to take the financial risk for the kit and therefore likely a contractor. If you use company kit, it could be deemed that you are under their control (How you do a job) and that you are part and parcel of the company. It’s a minor factor because the scenario of IT kit, there are various security measures that may make it impractical or irresponsible for a person to use their own equipment. Therefore, this is a small factor - but will help the determination of other factors.
Intention of the parties
The intention of the parties is rarely given much weight when it comes to assessing an IR35 status of a contract. The intention of a contract should have been detailed in the contract itself and acted on in practise. Therefore, establishing the evidence of the ‘intention’ is usually looked at from the contract point of view. However, if the contract was poorly written and other evidence can help clarify what was meant or intended, this would be taken into account.
Where no contract exists or the contract is suggested to have been a paper-exercise only, HMRC will review the ‘deemed contract’ in place which would be evidenced by the actions or the parties. For example, if a contract states a contractor would be available two days a week but in practise is available five days a week and the client makes use of that, then a deemed contract would suggest they’re available full time regards of the paperwork.
A final note on office holders - ie, a Chairman, CEO, Director, Treasurer, Non-exec Director, Nominee Director. These roles all fall inside IR35 and has been determined by case law. Only where these roles are temporarily filled or marked as ‘interim’ can they fall outside IR35. It is therefore important for all office holders to know that it is expected for them to be paying national insurance contributions.
These factors are all taken into account and weighed up alongside each other. There’s no formula to apply, simply that the evidence available on balance would suggest one way or the other. With this is mind, it’s ok for some of the above to fall inside IR35 as long as it’s the smaller balance of the overall picture.