If you are a contractor working through a limited company in the UK, your IR35 status will determine how you will need to correctly pay tax and national insurance. Changes to the IR35 legislation in the private sector came into effect in April 2021. These changes mean that end clients are now responsible for determining whether the working practices of the contractors they engage with fall inside or outside of the legislation. For a contractor to fall outside, the end client needs to use ‘reasonable care’ while looking at their IR35 status and issue the contractor or third-party they hold a contract with a status determination statement (SDS) once completed.
The key factors for determining your IR35 decision
While contracting, it is essential that your IR35 status is properly determined. Luckily with the new legislation, the key factors and employment status tests that determine your working practises have not changed. The main change is where the responsibility of who is making the decision falls. These factors include:
Control – The level of control the end client has over the contractor should be less than what it would be for an employer/employee relationship.
The client should not be able to supervise or instruct how or when the contractor must complete the work they are engaged for. If the employer has the right to do this, the contract will fall inside the legislation.
For it to fall outside, the contractor must have the freedom to choose when they work and which methods they will use to complete the tasks at hand.
Right to Substitution – This is a strong factor to determine if a contractor falls outside of the legislation. Substitution means the contractor has the right to provide another qualified individual to complete the work they are engaged for.
There should be a right to substitute outlined in the contract, with an agreement of how it will work in practice. This comes across as less of an employer/employee relationship and more business to business.
If the right to substitute is allowed but has too many restrictions around it, i.e. the substitute needs to be interviewed, the likelihood is it will not count as a genuine right to substitution.
Mutuality of Obligation (MoO) – A truly outside of IR35 contractor should be free to work how they please. If the end client is obligating the contractor to work specific hours, determining the number of hours that need to be completed or adding in rigid notice periods to the contract, it would point towards an inside-IR35 decision for the contractor.
The HMRC’s Check Employment Status for Tax (CEST) tool currently excludes MoO, as they believe that MoO is always present in a contract. This is a shame because case law around IR35 recognises MoO as a key indicator of a contractor’s employment status.
Other factors affecting IR35 determinations
As well as the key employment test factors mentioned above, there are other factors to be considered when looking at the IR35 status of a contract. To be deemed ‘outside’ it is critical that you appear and work as a separate entity to your end client. Areas you can address to support this appearance include:
- Supplying your own insurances – This shows the financial risk to yourself. If any errors are made while doing the work, you are taking responsibility to rectify them yourself.
- Not exclusively working for one end client – You can work for as many clients as you wish to at one time.
- Supplying your own equipment – When completing the work, you provide and operate on your own systems and hardware where appropriate.
- No employee benefits – You do not receive the same benefits as your permanently employed counterparts. You do not receive holiday pay, sick pay, or any other perks. Essentially, if you miss a day of work you do not get paid.
- You act like a business – Ensuring you have your own website, trading address and trademark.
It is important to remember our post today is just a guide to the factors that impact the IR35 decision of your contract. If you are unsure about IR35, we recommend engaging an IR35 specialist accountant. They will be able to offer expert advice, review your contract and make recommendations to how you will be operating where appropriate.