IR35 IN A NUTSHELL
A bit of background on IR35…
Introduced in April 2000, the purpose of the Intermediaries legislation (more commonly known as IR35 – a reference to it being press release number 35 from the Inland Revenue) is to tackle “disguised employment” by ensuring that income is taxed at the same rate as normal employment income in instances where the worker would have been an employee of the hirer were in not for their PSC. In other words, IR35 looks at the actual working practices that a worker has and states that if those working practices are indicative of employment (as opposed to self-employment), then the workers earnings must be taxed as employment income regardless of the vehicle through which they are paid. This means that when a worker is a director/shareholder of their own Limited company (sometimes referred to as a Personal Service Company – PSC) and carrying out an employed-type role, they should not be receiving payment in the form of a dividend and should instead be paying employment taxes (Income tax and National Insurance Contributions) on their total earnings for that particular assignment. New restrictions were also introduced in April 2016 which mean that Limited company workers who have employed-type working practices also lose the entitlement to claim tax relief on travel & subsistence expenses.
When working via their own Limited company, it is only workers that have self-employed working practices (and are therefore not caught by IR35) which have a legitimate entitlement to receive dividend payments (and receive tax relief on travel and subsistence expenses post April 2016).
Historically, the responsibility for assessing IR35 status and the subsequent payment of taxes has rested with the PSC
Assessing IR35 encompasses a broad range of factors that can all have an impact upon the manner in which the worker carries out their work. Furthermore, established case law indicates that determining employment status is not simply about ticking criteria off of a “check-list” in order to assess the presence or absence of discrete factors, but instead is about the accumulation of the details and the overall effect that those details have on the whole picture. What this means is that whilst there are several different things to look out for when it comes to determining IR35, these criteria cannot be simply tallied-up in order to determine the IR35 status, we need to take into consideration the differing impact that each of those factors will have on the overall working practices.
Factors that need to be considered:
1) Background to the available role. How did the role come about? Is it a short-term project- based role requiring a specific skill-set or is the role available because the client needs to replace an employee that has left the business? Remember that IR35 is about distinguishing between employed and self-employed type workers, so the clients’ reasons for having a worker there are important!
2) Previous status rulings. Has there been a previous ruling by HMRC concerning the role when someone else worked on it? Indeed, if someone else did work on the role then that could in itself suggest it is more of an employed-type role rather than an example of a client needing a specialist as a “one-off”.
3) Mutuality of Obligation (MOO). Do mutual obligations exist between the client and the worker that make the relationship look like that of an employer and an employee? A contract cannot be seen as a contract of employment (contract of service) if there is no mutuality of obligation, but most contracts will contain some level of mutuality of obligation, even if it is only for short-term “one-off” pieces of work. Mutuality of obligation is generally seen to be lessened by the worker carrying out a series of shorter-term assignments and/or by working more than one assignment simultaneously.
4) Control. Does the client have control over the working conditions (or the right thereof)? It’s more likely that a worker will be classed as an employee if they are under supervision, direction, and control and have their working time organised for them.
5) Substitution. Does the worker have the right to send a substitute to complete the work? A right of substitution is a strong indicator of self-employment, but if there is a right of substitution in the contract, this should be an accurate representation of the actual working parameters.
6) Financial Risk. Another strong indicator of genuine self-employment is the presence of financial risk. Workers who are paid by the hour or by the day are not taking the same sort of financial risk as those that “quote for the whole job” upfront.
7) Equipment. If the contract stipulates that all the equipment is to be provided by the client, then HMRC often argue that the contractor is a disguised employee. It is therefore a good idea to ensure that there is a contractual clause regarding equipment which indicates that the worker will provide their own.
8) “Part & Parcel” of the organisation. This term relates to whether the contractor has spent so much time with the client that they are integrated into their business. To fall outside of IR35, a worker should not be considered to be part & parcel of the organisation that they are providing services to.