The Essential Guide to IR35 in April 2021 – Part 1

Paul Mason Markel Tax
Last updated December 9, 2020

Introduction to IR35

At the beginning of October 2020, Markel Tax was delighted to present a practical overview of the changes to IR35/Off-Payroll working which were due to come into force in April 2021.

Whilst the slides and webinar recording were issued to registered attendees, there were questions which due to time constraints, we were unable to answer on the day, but have been collated and grouped into half a dozen key themes which form the basis of this article.


Determining Employment Status

There were a number of queries which dealt with the fundamentals of status, but before we come on to these, it should be stressed that we are only considering employment status from a tax perspective (although the approach to determining is largely the same for employment law) because the matter is that you are either an employee or you are not. The problem lies in the subjective nature in arriving at the answer!

The other point to make is that an engagement which is deemed “inside” (or “caught by”) IR35 from April 2021 in the private sector (or currently deemed inside in the public sector) does mean that the contractor’s engagement is taxed on the same basis as PAYE, but it does NOT give the individual any employment rights. The individual is an employee for tax purposes only.


So, how do we determine employment status?

We ask the question: “Does the engagement look like an employment relationship?” and the reason that we take this approach is because of the 1968 case of Ready Mixed Concrete (South East) Ltd v The Minister of Pensions and National Insurance in which the Judge established the key factors that make you an employee:

  1. You must be required to provide your personal service – you and no-one else will do the work
  2. You are controlled in the manner in which you do the work
  3. Mutuality of Obligations (MOO) exists; i.e. there is an expectation that work will be offered and accepted

If all three factors are present, the contract is one of ‘service’ (employment), but if one these is missing then it cannot be a contract of employment, so the relationship must be one for the provision of services or akin to self-employment.

As I noted in the webinar, despite the recent referees’ case (PMGOL) focussing on a lack of mutuality (but still to be decided at December 2022), MOO is still the most difficult of the three to argue and so it is much better if as a contractor/freelancer, you can demonstrate that your personal service is not a requirement of the engagement and/or you determine how the work is done.


Personal Service/Substitution

There were a number of questions around personal service and substitution. It is possible to deny personal service without sending a substitute, although actually sending someone else in your place – unless somehow manufactured – would be conclusive proof that personal service is not a requirement of that engagement.

However, when it comes to substitution, personal service would be denied if you had an unfettered/unrestricted right to substitute (your client would expect the replacement to have the skills, qualifications and experience to do the work and should only have the right to refuse the substitute if they don’t).

One attendee made the point that their contract required them to be responsible for paying the substitute if one was sent and did this happen in practice. One of the key elements of substitution is that your company remains in the contractual chain and is therefore responsible for the replacement including the payment of the substitute’s fees.

Moreover, if your company does engage a substitute make sure that all your contractual requirements are reflected in the arrangements with your substitute. If your company has to have Professional Indemnity of £2 million, make sure that your substitute has the same level of cover; if your company is required to rectify defective work at your own cost, make sure the same clause is in your contract with the substitute.

Do we see substitution happen a lot in practice? No, but from an IR35 perspective it is the genuine right to substitute which is important.



Talking of ‘having the right to do something’; when a tribunal judge considers the issue of control, they will determine if the client has the right to exercise control over how you do your work, not whether the client has exercised that right.

So it is important that your contractual terms demonstrate that you have control over how the work is done – “reasonable autonomy” doesn’t cut the mustard – and of course, the working arrangements need to demonstrate that in practice.


Mutuality of Obligation (MOO)

The issue of mutuality is a thorny one: as one question put it: if you are signing a contract to provide services for a period of time, is there not an expectation that you would see the contract out?

In reality, if a contractor has a history of not completing assignments, then offers of work will soon dry up.

However, you have to look into the detail: if the work is for X months with no deliverables, then is the freelancer just at the beck and call of the end client, moving from task to task and being renewed such that the individual looks like they are part and parcel of the end client’s business?

If you are on an engagement of six months with three months’ notice, once you get to the start of month four you are contractually obliged to complete the term.

On the other hand, if you are not obliged to be working for the client on any given day or the client terminates at very short notice and there is no expectation that you will be offered (or accept) other work, then clearly no mutuality exists.

There were a couple of question around the term Personal Services Company (PSC), which is not a legal definition, but a term used to define a company which typically has the one fee earner and often one shareholder/director, although many PSCs will have joint shareholdings with partners/spouses.  It does not mean that your personal service is a requirement of the engagement.


“If you are not obliged to be working for the client on any given day or the client terminates at very short notice and there is no expectation that you will be offered (or accept) other work, then clearly no mutuality exists”


Sole Traders

A couple of people were unsure if IR35 related to sole traders and the answer is that it does not.  IR35 is the commonly used term for the Intermediaries Legislation which came into force in April 2000.

The intermediary can be a partnership, but is usually a limited company – the contractor’s PSC – and the objective of the legislation is to require HMRC to create a “hypothetical contract”, i.e. effectively look through the intermediary in the contractual chain to ask what the relationship would look like if there was no intermediary and you were engaged directly by the end client.

If you are engaged as a sole trader there is no intermediary, the client is engaging you as an individual. If HMRC can argue successfully that arrangement is in fact one of employment, with no intermediary in the contractual chain, you must therefore be an employee of the end client.

If that is the case, HMRC have determined that the end client has failed to operate PAYE on your earnings and will be seeking arrears of Employer’s National Insurance Contributions, plus interest and potentially a penalty. In those instances where the individual has paid no income tax or Employee’s National Insurance, then HMRC will seek to collect these amounts from the employer as well.

For these reasons, end clients have not generally sought to engage people as sole traders. Prior to April 2021, if freelancers were engaged through their own limited companies, the status risk remained with the freelancer’s company.


Looking at the whole picture

One attendee wanted to know whether an engagement would be outside IR35 if their company is  engaged by a consultancy business which uses contractors to service work for its clients, but does not guarantee the freelancers work and for which the freelancers don’t work exclusively.

Unfortunately, there is not enough to go on here to give a clear opinion: we do not know the precise nature of the work or whether when working for the consultancy business the individual’s personal service is required and/or is being controlled in how they do the work. We also don’t know whether the individual is being portrayed as part and parcel of the consultancy business or as an independent contractor.

As a supplementary question, the person wanted to know whether the consultancy business might be acting as an agency. Again, we don’t know enough, and it will depend upon the consultancy businesses’ relationship with its clients – is it taking on the work with responsibility for its outcome? Or just finding people for the end client?

We had questions about working for multiple clients. If you are working for a number of end clients concurrently and you are therefore juggling work and determining when work is done and which client you want to work for on any given day, then that would be a positive, but necessarily wholly conclusive: is it still only you they want? Are they determining how the work is done even through you may have a significant say in when it is done?

There could still be mutuality in that once you have accepted a particular project you have to see it through to conclusion.

That is why tribunal judges also look at the whole picture and will still consider secondary factors like financial risk and whether you paint a picture of bring in business on your own account.

Going back to working for other clients. If you work X months for client A and then Y months for client B, that is not necessarily conclusive that the relationship is akin to employment. IR35 has to be considered on a case-by-case basis and on each occasion, you start by reviewing the three key factors.


This leads neatly on to a question about how and when IR35 should be addressed.

Certainly, the key factors should be referenced in the contractual terms if the arrangement is to be viewed as an engagement between independent contracting parties and the working practices must support those terms.

If you are unsure whether your contract is fit for purpose, then Markel Tax offers a contract review service. If you don’t have a contract, then it is advisable to make sure you get some professional advice to ensure that the terms are suitable for the services which you provide.

One person asked if Covid-19 has helped or hindered contractors from purely an IR35 status perspective, as it clearly has resulted in a reduction in available roles. Yes, there is an argument that engagements being cut demonstrates a lack of mutuality, but as noted in the webinar, one would want to be able to demonstrate a lack of personal service or (preferably ‘and’) deny that the end client has the right to control how the work is undertaken.

This leads on to a point noted about working from home: there has been a realisation by end clients across the piece that you don’t have to be able to see your contractors (or indeed employees) every minute of the working day to be satisfied that they are doing a good job.

The outcomes should be what the end client is measuring, not the visibility of its external resources.

There were two questions around the future of contracting due to the April Off-Payroll working changes and the Covid-19 pandemic, particularly if we have a future epidemic to contend with. Not sure it is possible to answer the pandemic query, but in respect of private sector changes, it absolutely won’t spell the end of contracting.

There will be many contractors who will see a worsening of their tax position and in some cases they will feel justifiably aggrieved at the way their end clients have approached the changes.

There will be contractors who find themselves forced to take employed roles – and indeed, in some cases that will reflect the reality of the situation – and some will be engaged by umbrella companies. However, the UK economy is built upon a flexible labour force and small business, so freelancers will still be required in large numbers, if not the volume we have seen in recent years.

Moreover, if the experience of legislative changes in the self-employment market is anything to go by, the initial knee jerk reactions begin to be reversed when engagers realise that their competitiveness is being hit by an overly risk averse approach. There is certainly anecdotal evidence to suggest that by the end of 2022, we were beginning to see greater engagement with the legislation from end clients seeking to attract and retain the best contractor talent.

This point feeds into the answer to one question which anticipated that end clients would simply stop engaging contractors and had HMRC foreseen a reduction in contracting which might ultimately result in less tax being recovered from the freelance population?

It is true that if many contractors are engaged as employees in future, there will be less corporation tax and less VAT being collected by HMRC; but one assumes that HMRC expects increased PAYE to be flowing into the Treasury. Nevertheless, one needs to return to the point that this legislation is not going to rid the economy of freelancing, but it certainly has changed the freelancer landscape.


Click here to download our Contractor’s Guide to IR35



Related Articles:

The Essential Guide to IR35 in April 2021 – Part 1 

The Essential Guide to IR35 in April 2021 – Part 2

The Essential Guide to IR35 in April 2021 – Part 3

The Essential Guide to IR35 in April 2021 – Part 4 

The Essential Guide to IR35 in April 2021 – Part 5 


Author Paul Mason, Head of Tax Partnerships at Markel Tax

For IR35 consultancy services please contact Markel Tax on 0345 223 2727.

IR35 Products & services

Caunce O’Hara’s partnership with Markel enables us to offer a broad range of IR35-based products to protect contractors, fee-payers and end clients across the UK.

IR35 Hub Related IR35 content