Making the right call on IR35 status

What are the factors involved for making the correct decision

Dec 10, 2020
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What decides IR35 status?

Deciding a contractors IR35 status can be a difficult job and this is quite clear when you look back over recent years where case law shows that even legal experts have different opinions on what are pretty much the same facts. This has probably been a factor in HMRC changing the focus of where liability sits in the chain, because it is easier to target and bring success against employer intermediaries than individual PSC’s.

The IR35 status check must consider many factors in the round, here are a few key elements to consider:

Personal Service/Substitution

If the contractor has the right to provide a substitute this is a strong indicator towards being self-employed and sitting ‘outside’ IR35. Simple. However, if there are too many restrictions, e.g. involving an interview process, this would raise questions whether it was a genuine ‘right to’ substitution.

If another suitably qualified contractor could be sent as a replacement to provide the same service/same role, then the contract could most likely fall outside IR35.

There should be a right of substitution clause in the contract (these can also be seen in sole trader engagements) specifying the contractors right to substitute if required, it also helps if there is a bit more detail in writing of how this would work should the need arise.

Control

This topic will be familiar to sole trader engagements, so for a position to be outside IR35 the level of control exercised over the contractor by the end hirer must not be the same to what would be expected in an employer/employee relationship. The following statements would suggest that there is too much client control and would lean towards being inside IR35:

  • The client has supervision and control over the contractor’s work. If the client can dictate how the work is completed and has the right to direct the contractor, this is an indicator that the assignment will fall inside IR35.
  • The client can control what the contractor works on. This could be evidenced by an exclusivity clause meaning the contractor is unable to work with anyone else while engaged by the client.
  • The client can control when the contractor must work. This could be seen in the specification of start and finish times or which days the contractor must work for the client.
  • If the client specifies where the work must be completed, for example from their offices.

A genuine contractor should have control over how, when and where they work.

Mutuality of Obligation (MOO)

If a contract specifies exclusivity, an excessive notice period or a number of hours of work per week, this would point to a position inside IR35. These are similar terms that you would find in an employment contract e.g. for Umbrella PAYE employees, whereas genuine contractors are able to do whichever projects they choose, from whatever client they wish to work with. They should also be free to turn down the work from any client.

HMRC’s Check Employment Status for Tax (CEST) tool, has been criticised for not including MOO, as they believe that MOO will always be present in a contract, which is a clear lack of understanding as MOO is often referenced in case law as a key indicator of employment status.

Other areas to consider

The bloated IR35 checks don’t stop with the key employment tests. There are also several other factors that must be measured when looking at the IR35 status of a contract:

  • Financial risk – is this a genuine risk to the contractor? Making a profit and a risk of making a loss should both exist. Being able to demonstrate that the contractor carries financial risk can be a strong indicator towards a position outside IR35.
  • The ‘Part & Parcel’ test – This is where HMRC will check to see if the contractor is ‘integrated’ into the end-hirer’s business which could suggest an employment relationship. It can be things like managing employees of the end-hirer, having their own desk or being allowed to join a pension scheme and attending staff events.
  • Provision of equipment – Contractors should buy their own equipment as much as possible, which would suggest being ‘outside’ of IR35. Using the end hirer’s own equipment, even stationery could suggest being ‘inside’ IR35.
  • In business on your own account – Does the contractor act like a real business? Do they have a company website, company bank account, insurance cover, an office address, even branded stationery? If they do, this could point to an outside IR35 position
  • Confirmation of Arrangements – If this document is evident between the contractor and client, then it could be a pointer to be outside of IR35 as it confirms that both parties agree on things like the right of substitution, lack of control etc. Of course, it may be that the end client does not want to agree to such terms and likewise it could also be undermined by the contractual details throughout the whole of the contract chain.

What we have detailed here is not an exhaustive list and just goes to show the complex nature of making the right call on a contractors IR35 position.  

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