The IR35 legislation was introduced nearly 20 years ago.
The aim of the legislation is to combat tax avoidance by individuals operating through a Personal Service Company (PSC), where for all intents and purposes they would be an employee of the client if the intermediary was not used.
The reform to this legislation within the private sector was due to come into effect on 6th April 2021 buth as been delayed. Click on this article to learn more.
The IR35 legislation was introduced nearly 20 years ago.
The aim of the legislation is to combat tax avoidance by individuals operating through a Personal Service Company (PSC), where for all intents and purposes they would be an employee of the client if the intermediary was not used.
The reform to this legislation within the private sector came into effect on 6th April 2021. Contracts need to accurately reflect the working practices followed in the client/ contractor relationship.
If HMRC decides the relationship is of an employment nature, they will seek to recover all income tax and National Insurance contributions due over the period of the contract affected.
Determining whether IR35 applies to your contract is a complex matter.
There are key principles that will determine your IR35 status, to help you get a feel if your contracts will fall inside or outside of IR35, we've listed each factor and what helps or hinders you operating outside of IR35.
Inside or Outside IR35?
Mutuality of Obligation
An independent contractor should not expect to be moved from task to task outside any terms within the agreed schedule of works.
Neither should you believe you have to accept any work offered, nor should a hirer expect you to have to accept any new role offered by them.
If this expectation existed, this type of relationship would be indicative of employment.
OUTSIDE:
The client is not obliged to offer work and the contractor is not obliged to accept the work
INSIDE:
The client has an obligation to keep offering work to the contractor, the contractor is obliged to accept.
Control
If you are operating outside IR35, you should be able to demonstrate some autonomy in relation to the manner in which the work is carried out
OUTSIDE
The contractor has the freedom to decide how what, when and where they complete the work.
INSIDE
The contractor is told how, what, when and where they complete the work.
Right Of Substitution
One of the most important factors when considering employment status is whether or not there is the provision of a personal service. If you were unavailable to carry on the role, for example, because you were sick, would you have the right to get someone else to carry out some or all of the work that needed to be done? If you could substitute then this is a strong indicator of your role being outside IR35.
OUTSIDE
The contractor has the right to substitute the service to someone else who is qualified.
INSIDE
The contractor is personally obliged to carry out the services.
Part and Parcel of the organisation
The ‘part and parcel’, or ‘integration’ employment status test asks whether the worker is integral to the end client’s business or merely an accessory to it. A genuinely self-employed person should only be an accessory to their client’s business, carrying on a business outside and separate from the client's organisation
OUTSIDE
roject based, has an end date, uses own equipment, treated as an independent contractor etc.
INSIDE
Rolling contract, appraisals, eligible for bonus, is detailed in an org chart, and invited to employee functions etc.
Termination Clause
The ideal IR35-friendly contract would have no notice period as notice periods are reminiscent of an employee and employer relationship where both parties are required to give notice, this is however not always possible. A typical contract that is outside of IR35 will state that the contractor is there to deliver a particular service or project and once completed the contract will end. If a notice period is required, it should be an immediate notice or a short notice period
OUTSIDE
Either party is able to terminate the contract without notice.
INSIDE
The contract between parties has lengthy notice periods.
Contract Length
Having fixed start and end dates when working outside the legislation matters. By not working on a rolling contract you can strengthen your status as a genuine contractor. It’s therefore worthwhile to set a project or contract length, which may prove useful in evidencing that you aren’t ‘part and parcel’ of your client’s organisation
OUTSIDE
The contract isn't related to the length of time, but instead the specific piece of work
INSIDE
The contract is for a fixed term or on a rolling basis.
Financial Risk
A contractor who is working outside of IR35 will normally undergo an element of financial risk by taking on a contract. This could be the cost of new equipment, a training course or professional indemnity insurance to cover the course of the contract
OUTSIDE
The contractor risks their own money, (i.e. marketing, equipment). A reduction in pay from missed deadlines or poor work standard
INSIDE
The contractor doesn't risk their own money or have responsibility for the standard of work
Employee Benefits
An independent contractor is not entitled to employee benefits such as, holiday pay, sick pay and maternity pay.
OUTSIDE
The contractor is not entitled to the employee benefits.
INSIDE
The contractor does not receive employee benefits..
Tools and Equipment
Unless there’s a sound reason (such as for safety, security or practicality), you should be using your own equipment, rather than equipment supplied by your client.
OUTSIDE
The contractor provides their own tools and equipment.
INSIDE
The client is responsible for providing the tools and equipment to the contractor.
Intention of the Parties
The contract should always clarify the intentions of the contractor and client (or agency) to be one of supplier and customer and not employee and employer. The nature of the work should be described accurately. If the intentions of the parties, as expressed in the contract, bear no resemblance to the real intentions of the parties, the written intentions will likely be ignored by HMRC
OUTSIDE
All parties are clear that it is a business-to-business agreement
INSIDE
One of or all of the parties think the contractor is actually an employee of the client
Other things you should take into account are being able to demonstrate that you are “in business on your own account” – you may not have stock, premises, or staff but you will probably have an office (even at home), a website, be VAT registered, have business stationery, advertising, invoices, insurance and have other clients and an accountant.
