Being ‘Outside’ or ‘Inside’ IR35
As employment status and IR35 is so important, below we will take a look in more detail at the factors that are taken into consideration when assessing IR35 compliance, and how you can mitigate the risks associated with disguised employment.
If an assignment contains evidence of ‘employment indicators’ and has the same level of risk, responsibility and liability expected of an employee, the engagement would be classed as being ‘inside’ or ‘caught’ by IR35 legislation. The consequence of this is that HMRC would view the contractor as a disguised employee, and so would take the stance that their income too should be treated as employment income. PAYE tax and National Insurance Contributions should be deducted at source, along with there being a reduced entitlement to expense claims, as disguised employees are not entitled to the same corporate tax structure as truly independent contractors.
Being caught by IR35 and treating the income as employment income does not mean that a contractor cannot trade through their limited company. Any other contract work carried out could also be put through the existing company and be compliant with IR35.
As employment status is assessed on an assignment-by-assignment basis, having one assignment fall within the scope of IR35 will not impact any previous or future engagements that a limited company works on, nor will it create a certainty that other assignments of its type will be deemed to be captured. The best course of action to be taken by individual limited companies is to seek expert advice for each individual assignment, whereas end-hirers may wish to have individual role titles assessed in order to understand the efforts required for each to be compliant with IR35.
The points considered below provide guidance on factors which are assessed when reaching a conclusion on IR35 status, and so may prove useful to independent contractors, recruitment businesses and end-hirers alike in making their own assessment in relation to adopting a clear position in relation to IR35. However, IR35 regulations are extremely complex and so it is highly recommended that independent, professional advice is sought such as that provided by Brookson Legal Services.
Supervision, Direction and Control: Independent contractors should be free to arrange their own activities, deciding for themselves how to complete the desired objectives of an assignment, where to provide those services from, when to carry out their work and what tasks to perform. End-hirers should not have the right of, nor seek to exercise, supervision, direction or control over their contractors.
Financial risk: Working through your own limited company brings with it an element of financial risk in experiencing costs and losses associated with being in business on your own account. Limited company contractors should be responsible for providing all of their own equipment, getting business insurances in place, funding their own training/continued professional development, hiring individuals to assist and any other financial requirements in satisfaction of their contractual obligations. HMRC will look at all of these when considering whether a genuine financial risk has been taken.
Substitution: Having the right to provide any suitable individual through the limited company to carry out its services is fundamental to IR35 compliance. Such right rebuts the presumption that a client requires a personal service of the limited company’s director; personal service is highly indicative of employment and so it should not be present if IR35 is to be satisfied. The right to substitute must be valid, that is to say that an end-hirer will not unreasonably withhold or delay it in practice. It is not sufficient to merely have a clause within the contract.
Mutuality of Obligations: This concerns to what extent a client is obliged to provide work, and similarly whether the contractor is obliged to accept work offered by a client. Evidently, there will always be some degree of such obligations present as there is an agreement in place for specific tasks to be completed in order to satisfy the contract for services. What is most important is that the client is not committed to offering further works which fall outside the scope of those initially agreed, and that the contractor is not compelled to provide services which fall beyond those which were accepted within the original scope of works.
Integration: In order to be compliant with IR35 it is important that all parties understand the nature of the relationship being entered into. Clients must accept that limited company contractors are an external workforce and so should treat them as being such to avoid integration into the client’s workforce. Contractors should be exempt from employee benefits such as holiday and sick pay and pension contributions, and they should be exempt from any employee activities or facilities including social events, discount schemes, training courses and subsidised memberships.
Please be aware that HMRC won’t just look at the above. They review all aspects of an assignment and the limited company’s business to establish that the contractor is a director genuinely running, managing and controlling their own company, rather than operating as an employee whilst enjoying certain tax relief.
Find out what the considerations are for workers in ‘manager’ roles.