Guidance

IR35 is the name commonly given to tax legislation that was introduced in 2000. The purpose of the legislation is to distinguish between the genuinely self-employed, working through an intermediary (typically their own limited company, or “personal service company”, “PSC”), and those who work through a PSC, but whose working practices and contract suggest they operate more like an employee (or “disguised employee”, to use the language of HMRC). The genuinely self-employed will usually receive gross payment for their services, via their PSC, allowing them to pay some of their income in dividends. This usually creates a tax benefit. Operating through a PSC will also, usually, reduce the amount of National Insurance payable. “Disguised employees” should pay broadly the same Income Tax and National Insurance as an equivalent employee would.

When determining whether a worker is genuinely self-employed or a “disguised employee”, employment status tests should be applied. However, these employment status tests have not been codified and there is no set checklist that can be considered in order to determine whether or not someone is a true independent contractor. Employment status tests which have been established in decades of case law must be understood and applied. The relevant tests include:

• Can you provide a substitute?
• Are you subject to the client’s control?
• Is there a mutuality of obligations between you and your client?
• Do you bear any financial risk?
• Do you invest in your own business?
• Do you provide your own equipment and training?
• Do you receive holiday/sick/maternity pay from your client?

Independent contractors should have a high degree of expertise and knowledge. Therefore, generally speaking, they should not be subject to a great deal of control in terms of how the services are provided. There are various limbs to “control”, namely, how, where and when the work is to be carried out. However, “control” should not be confused with monitoring the progress or quality of the work being undertaken, as the latter is a reasonable approach adopted by end hirers in order to ensure the services are progressing according to the overall project plan.

If the end hirer is obliged to provide the contractor with work to carry out on an ongoing basis and the contractor has an obligation to carry out that work, it can show that there is a “Mutuality of Obligation” between the parties.

In order to rebut this presumption, the contractor should be engaged for a specific project/assignment. Once the project/assignment has ended or been completed, there should be no expectation on the end hirer to offer any additional work to the contractor, or if it does offer additional work, there should be no obligation on the contractor to accept it.

Mutuality of obligation has sometimes been found to exist where workers have been required to work a fixed number of hours for an end hirer, although where there is flexibility in when and how those hours can be worked this has been found to be of less relevance.

Furthermore, the end hirer should not request the contractor to perform tasks outside the terms of the assignment. If the contractor was to carry out such tasks without the terms of the engagement being revised, it could be indicative of employment.

The contract by which the contractor provides their services, via their PSC, should not place any obligation on the contractor to provide a personal service to the end hirer, as personal service is a strong indicator of employment. There has been case law which demonstrates, where a contractor has exercised their right of substitution in practice, they are clearly not providing a personal service and are therefore operating outside of IR35. Many contracts by which contractors provide their services will include a “right of substitution” clause; however, the courts will usually look behind that and examine whether a true right of substitution exists or whether the right of substitution clause has been included to give the impression that a substitute can be provided, when in practice that would never happen.

From its introduction in 2000, until changes were introduced in the Public Sector in 2017, the obligation for determining the worker’s employment status rested with the PSC, acting through its director, the worker. Similarly, any tax risk also rested with the PSC. From April 2017, in the Public Sector, the responsibility for determining a worker’s IR35 employment status moved to the Public Sector end hirer.

As of April 2021, Private Sector hirers became responsible for determining the IR35 employment status of the contractors they engage.

Workers engaged through umbrella companies pay Income Tax and National Insurance as employees and therefore IR35 does not apply. It is likely that some flexible workers, previously working in the Private Sector as PSC contractors, will move to umbrella employment if their client decides that they are operating as “disguised employees”.

End-Hirer’s should have taken steps to understand and assess their off-payroll workforce. End-Hirers should have gone through a process of determining the status of the off-payroll workers engaged to understand which workers fall Inside and Outside IR35. End-Hirers should have also considered the potential cost implications for a worker who is Inside IR35 and what options are available to them moving forward.