IR35 – or the Intermediaries Legislation – was introduced by HMRC in 2000, and was aimed at individuals who were disguising themselves as employees in order to pay less tax than they should be.
The aim of the legislation was to tackle certain individuals who were providing services similar to an employee but through their own limited company or partnership instead.
This form of tax avoidance does not just benefit the contractor though – employers also benefit as this way of hiring workers means they don’t have to give them employee benefits or pay employers National Insurance contributions.
To be ‘inside IR35’ means that you are considered, for tax purposes, an employee of your end client and therefore subject to PAYE. And, if you’re outside then HRMC deems you as a genuine business.
Seems simple enough, right? Wrong.
The trouble is that the ambiguity of IR35 means that many people find the legislation hard to understand. And, with their history of IR35 tribunals not following much consistency, even HMRC seem to struggle with what exactly constitutes being ‘caught’ by IR35.
So, how exactly does HMRC go about determining IR35 or employment status?
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. 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.
Look for your contract to contain:
- a clear right for the contractor 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 contactor remains in the contractual chain and responsible for the engagement including payment of the substitute
- the contractor remains responsible for any handover costs – but there should be no requirement for a handover to last for a specific period of time; 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 more 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. In Primary Path, the judge noted that the contractor had conducted a feasibility study; thereby determining the ‘what’ of the project. Whenever a contractor is working from their own offices, we will demonstrate the contractor’s control over the ‘where’ and ‘when’ as well.
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 the method of the performance of the services”; i.e. how the work is done.
Contracts need to have a clause which is as unambiguous as the italicised wording in the previous paragraph. A clause which offers merely ‘reasonable autonomy’ is simply not 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: 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); secondly, whether there is mutuality within the engagement, i.e. whether there is 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 not only with regard to ongoing work but also 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.
Factors which demonstrate that you are genuinely ‘in business on your own account’ should also be considered. The ownership of significant assets, financial risk and the opportunity to profit are indicators of a contract for services.
Whilst it is preferable to be able to demonstrate a genuine business operation, when determining status, these factors are secondary to the key factors above, but can be used where the three key areas do not provide a conclusive result.
Article supplied by Markel