IR35 focuses on workers who disguise themselves as contracting through a limited company, but who would typically be an employee if the limited company did not exist. This is an attractive options for employers and employees as there are tax advantages for both parties.
Should HMRC find the worker to be "inside IR35" they will have to pay income tax and national insurance, which could result in a large tax bill for the worker.
Knowing if you are inside or outside IR35 is important to avoiding any surprises.
How we help our clients
The key question is: are you inside or outside IR35. HMRC look at some key areas when assessing if a contractor is inside or outside IR35. Some of the areas we look at are listed below. Making sure these areas are being applied in practice is important to avoid being seen as inside IR35.
IR35 - What to consider
When assessing whether your contract for services is inside or outside IR35, HMRC do not look only at the contract. They also consider what is actually happening between the vendor and the contractor.
Listed below are some of the areas to consider. It is always sensible to include these points specifically in a contract where possible.
We would be happy to discuss your situation with you to assess your current position.
Supervision and control are classic tests when considering a contractor to be inside IR35. Areas to be considered as to whether there you have your own control are:
Clauses that may suggest the vendor has control or supervision over the contractor
The start and end time for the daily work
Which days the contractor is allowed to work
Breaks, for example, lunch
A contractor has control over the hours they work and the work carried out. Should the points above be part of your contract or the practical reality, HMRC would likely consider you to be in IR35 ie an employee.
Contractors are usually paid on the basis of certain milestones being reached. An employee is paid on a weekly or monthly basis, regardless of the milestones being reached. Contractors can still invoice weekly or monthly, however, the invoice should make clear what work has been done as well as the hours worked together with their rate. It would be normal to expect the invoices to be for varying amounts.
Adding information such as any mistakes is the fault of the contractor and should be rectified by them, suggests that the financial risk is with the contractor, something an employee would not be responsible for.
Contractors supply and use their own equipment for the work. Employees are normally provided with the equipment to do their work. This is not a hard rule as sometimes contractors may use equipment provided by the vendor, however, there should be a reason as to why this may be the case.
Is there a fixed notice period in your contract? If so, this would suggest you are like an employee. Contractors do not have a notice period; their contract is terminated immediately.
Contractors work on their own basis and at their own potential loss. They are not provided with holiday pay, sick pay, pension contributions, training courses, to name a few. Employees, on the other hand, are entitled to all of this.
An employee cannot choose to send someone else in one day to work instead of themselves. A contractor can. If the contractor is in a position to do this or even use a substitute, then this is a strong indicator that you are outside IR35.
Similarly, if the contract does not allow for a substitute to be used, or there is correspondence or otherwise to suggest this, then it is likely you will be considered as being inside IR35.
Taking on other contracts
Employees are tied to their contractors and do not take on other jobs at the same time. Contractors can take on as many jobs as they want. It is up to them. Should the contract state or the situation be that you can only work for this vendor, then you will be considered as being inside IR35. Having other clients that you are working on simultaneously would suggest you are outside IR35.
Role in the organisation
Contractors have no position within their clients' organisation. Being provided with a phone number, permanent security pass, involved in projects outside of your contract, having people report to you are all what you would expect an employee to do. A contractor would not. This is why it is important to make sure what is happening in reality, does not contradict what it is in your contract. Ensuring that you are separate from the organisation is very important to avoid being caught up in IR35. HMRC can choose to look beyond the contract. Careful consideration should also be taken when updating social media to ensure your profiles do not suggest you have taken up a role at any of your clients.
In addition to the points above, other areas such as having a professional contract, the job title and even what was advertised by the company when they were looking for help all play a part in determining your relationship with customer for your services.
HMRC look at the whole situation. It may not be enough to cover some of the points above and ignore others. Where the risk lies, the level of control and the liability should anything go wrong are key factors in determining who falls within IR35 and who does not.
HMRC has now published its IR35 employment status checking tool that will be used to determine IR35 Contract status for Public Sector contracts. Click here to use this service.