What Is IR35?
IR35 is a legislation that was introduced
in April 2000 as a way of preventing Limited Companies
from taking a dividend where they acted as an employee,
thus forcing people who were caught by IR35 to pay PAYE
tax and class1 national insurance.
How do I stay IR35
Compliant?
There are a number of principal factors that
need to be considered in order to remain IR35 compliant,
especially when entering into a contract. These are:
- Working Practices
- Right of Substitution
- Control
- Provision of Equipment
- Financial Risk
- Basis of Payment
- Exclusive Service
- Part and Parcel of the Organisation
- Factors Personal
to the Contractor
- Mutuality of Obligation
Please note that two of the
above factors may be sufficient for an individual to
be outside of IR35.
Working Practices
Not only must the contract be IR35
compliant but it is also important that the contract
is accurate and reflects the true working practices.
It is the contractor’s
responsibility to ensure that this is the case. We
always recommend that these details are confirmed with
the client and where possible the client signs a working
practices document, although this is not always practicable.
Right
of Substitution
A Service Company enters into a contract
to provide a service rather than personal skills and
should be able to provide a substitute or engage helpers
to provide the service. An employee would provide his
services personally.
Example: John Smith is contracted
to work at a telecoms organisation, but unfortunately
falls ill. His service company should then be able to
offer a substitute to replace him for the remainder of
the contract. If there is no substitute, it’s a
strong indicator of employment and thus within IR35.
The case of Chaplin vs. Australian Mutual Provident
held that:
“…the power of unlimited delegation
is almost conclusive against the contract being a contract
of service i.e. within IR35”
The right to substitute
someone else to undertake the work must be a genuine
one. The substitute must be answerable to, and paid by,
the Service Company who originally undertook to complete
the contract. The right to substitute must not be unreasonably
fettered. A right of substitution is only valid if the
original Service Company remains responsible for paying
the substitute. The right of substitution is one of the
strongest tests of self-employment.
Control
It is essential the Service Company maintains
autonomy over how, when and where the services are provided,
both in the contract and genuine working practices.
The
contractor must not be supervised or controlled by the
client as if he/she were an employee. Where a client
can move the contractor from job to job due to the changing
priorities, then there will be a right of control over
what is to be done and this is a strong indicator of
employment.
The location of the services may be decided
by the engagement itself, but it is important that this
is agreed upon. It is always beneficial for IR35 compliance
if services can be provided from the Service Company’s
own offices, even if it is for a relatively small percentage
of the time.
The contractor should not have set working
hours that are dictated by the client, the contractor
would be expected to arrange his hours to suit the task
and his own convenience.
Provision of Equipment
Equipment and other facilities
provided by the Service Company can be important. An
employee will have all of the necessary major items of
equipment and facilities provided by his/her employer.
Contractors will generally provide their own equipment.
Financial Risk
If the Service Company concerned is a
genuine business then this is the most relevant test
of all. A contractor is responsible for how his/her business
is run. Unlike an employee, he/she will provide their
own equipment, hire their own helpers, take a financial
risk, take responsibility for investment and management
and has the opportunity of profiting from sound management
in the performance of his/her task. HMRC will look at
the risk being taken by the contractor, as it is not
usual for an employee to take a financial risk.
Basis
of Payment
How the Service Company is paid can be an indicator
of IR35 status. Payment in terms of an hourly, weekly
or monthly rate is associated with employment, whereas
a Service Company should negotiate a rate for a job,
invoice for the work done and bear the expenses and overheads.
It should be remembered that HMRC’s own Schedule
E Manual states that a self-employed individual can be
paid by the hour or day and therefore this test is inconclusive.
Exclusive
Services
Where a Service Company works exclusively for
one client, there is a presumption that the contractor
providing the services is an employee, as it is usual
for a Service Company to work for more than one client.
HMRC do not see this as important however; their view
seems to be that most employees are not restricted to
working for one employer. It has been stated in a previous
tax bulletin that HMRC do concede that ‘long periods
working for one client may be typical of an employee,
but are not conclusive’. The article then goes
on to say however that ‘regular working for the
same client may indicate that there is a single and continuing
contract of employment’.
Part and Parcel
Many contractors often do not realise
that they are gradually becoming part and parcel of the
client’s organisation
and this usually happens in cases where a Service Company
has been providing services to the same client for a
lengthy period of time. Pointers towards becoming part
and parcel of the client’s business are:
- Managing
the client’s staff or being managed
by a member of the client’s staff
- Attending ‘staff’ meetings
which do not relate to the services you are providing
- Having to notify the client of absence within a
certain amount of time e.g. within the first hour of
the first day of absence
- Attending company social events
such as the Christmas party without paying etc.
- Receiving
bonus payments relating to your performance
- Access
to free or subsidised meals from the canteen
- Use of
the staff gym
- Being shown on client lists such as telephone
lists. Please ensure that you are clearly identified
as a ‘contractor’.
Service Companies should
be aware of these characteristics and ensure that they
steer away from them. It is very tempting to accept
the offer of a bonus payment however this could be
detrimental when determining IR35 status. A Service
Company can, of course, include performance incentives
providing they directly relate to the contractual terms.
Factors
Personal to the Contractor
Other factors such as VAT registration,
professional indemnity, employers and public liability
insurances, health and safety requirements, licences,
advertising, training, company stationery etc. should
be taken into account.
Mutuality of Obligation
An employer will try to make
sure that their employees have a continuous supply of
work and will also expect the employees to carry out
the work when it requires. A Service Company will do
the work it has been contracted to do and will complete
the project with no expectation of further work. When
work is regularly provided and accepted over a period
of time, HMRC may take the view that ‘employee’ status
has been created by custom and habit. A long notice period
(say exceeding 30 days) is an example of this.
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