Factors that determine IR35 status

Caunce O'Hara & Co Ltd Logo
Written by Caunce O'Hara
Last updated March 1, 2021

IR35 v self-employment

Just to clarify a key point before we begin, a contractor does not have to be engaged through a limited company (or partnership). And the engagement of workers on a self-employed basis (i.e. an individual providing services but NOT via a limited company) still produces a saving to the end client, because payment of someone genuinely self-employed can be made without the engager making PAYE and NIC deductions.

However, where the individual is engaged as a self-employed worker, and is subsequently deemed by HMRC to be an employee, it is the engaging organisation which is responsible for the unpaid tax and NIC.

For this reason, many companies (from a range of industry sectors) will only engage workers via their own company – or even encourage existing workers to incorporate and return to work via their own company.

When deliberating the status of an engagement with a limited company, this involves the consideration of a contractor’s ‘IR35 status’. When considering the engagement of an unincorporated worker, this is a question of the worker’s ‘employment status’.

The key question is ‘how do you go about determining either form if status is similar?’


How do we determine IR35 status?

There is no statutory definition of what constitutes a contract of service (employment) or a contract for services (self-employment).

It may seem strange, but the question we must start with is: “Do we have a contract of employment?”

This is because in the landmark employment status case Ready Mixed Concrete v Minister of Pensions and National insurance (1968), Justice MacKenna set down those factors that were consistent with a contract of employment and answering this question would confirm that if one or more of these factors was missing, a contract of service (employment) could not exist.

The three key elements which need to be present in order for a contract of service to exist are:

  1. The requirement for the worker to perform the services personally (i.e. cannot provide a substitute worker).
  2. An obligation to accept work which is offered, and an obligation for the employer to provide work.
  3. For the employer to retain a right of control over the worker.
  • This means that an employee has to provide their personal service (so they cannot send a substitute to do their work);
  • they are controlled by their employer, by which we mean that the employer can determine how the employee does the work and prioritise their diary;
  • lastly, there is mutuality of obligations (MOO) which creates an expectation that work will be offered and accepted, but also an obligation to see the work through to conclusion.


Personal service / substitution

Where an individual is required to provide the services personally and is not able to send a substitute, this is an indicator of a contract of service (employment). If a substitute can be sent to perform the work, it cannot be a contract of service and must therefore be self-employment.

However, the right to send a substitute should be absolute and not overly fettered to be effective in demonstrating a lack of personal service; i.e. the client or agency should only be able to refuse a substitute on certain grounds.

You should be looking for a contract to contain:

  • a clear right for the PSC to provide (not ‘offer’) a substitute;
  • the client’s grounds for refusal should be limited to a lack of skills, experience and qualification (and perhaps security clearance) and no more;
  • the PSC remains in the contractual chain and responsible for the engagement and payment of the substitute;
  • the PSC remains responsible for any handover costs – but there should be no requirement for a handover to last for a specific period of time (that is the PSC’s decision). Examples of two week handover periods being required are nothing more than a barrier to substitution.



Where the client retains a right of control over the worker, this is indicative of a contract of employment. If it can be shown that the client does not have the right to exercise control over the worker, case law dictates that you cannot be an employee.

The most important element of control is whether the work provider controls the manner in which the worker performs the services i.e. ‘how’ the services are performed.

HMRC like to argue the importance of the ‘what’, the ‘where’, and the ‘when’, whereas it is only when the contractor has control of these factors, that one would highlight these in an IR35 enquiry.

Yet the reality is that many engagements will be projects which the client has determined must be undertaken and for practical reasons can only be undertaken on site and within office hours. However, that is the same for the employee as it is for the independent contractor.

What determines whether the contractor is free from client control is whether the contractor is responsible for how the work is done.

Contracts must have a clause which is unambiguous. A clause which offers merely ‘reasonable autonomy’ isn’t good enough to deny the client (or agency) a right of control.


Mutuality of obligations

There are two areas to be considered under mutuality of obligations:

  1. Firstly, whether there is an obligation for one party to offer work, and if offered, whether there is an obligation for the other to accept (often referred to as ongoing mutuality).
  2. Secondly, whether there is mutuality within the engagement, i.e. is there an expectation that the engagement must be seen through to the end by the contractor/service provider.

To fully satisfy the requirement for a lack of mutuality of obligations it should be clear that a lack of obligations exists with regards to both the ongoing work and during the contract period.

HMRC’s current opinion is that the provision of services in exchange for payment is sufficient to create mutual obligations between the parties. Whilst we have never shared this view, a lack of mutual obligations is perhaps the hardest area on which to base an argument than an engagement should fall outside IR35.

It is therefore positive to see that there are a number of cases going through the courts which if successful for the taxpayer, may reaffirm decisions made in cases such as Carmichael and Another v National Power (2000) and force HMRC to re-engage with MOO. Perhaps even to include it within their Check of Employment Status for Tax (CEST) tool.

lack of mutual obligation must be made clear



Caunce O’Hara offer a range of business insurance solutions to help contractors stay protected including Tax Enquiry & Legal Expenses Insurance, which provides cover for costs incurred by a HMRC investigation. Tel 0333 321 1403.

Markel Tax offer specialist IR35 tax services to help end client decision-makers ensure they are compliant with the legislation.  Agencies who may be concerned about their fee payer liability can also consider insurance. To find out more, please contact Markel Tax on 0345 223 2727.

Caunce O'Hara & Co Ltd Logo
Written by Caunce O'Hara
Last updated March 1, 2021

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