FAQ: What is IR35?
The Intermediaries Legislation (IR35) was introduced in April 2000 in order to eradicate the avoidance of tax and national insurance contributions by using intermediaries. If it can be proven that the relationship between a contractor and his client would have been one of employment were it not for an intermediary then the contractor is brought within the IR35 legislation.
For contractors across the UK this means that in order to reap the benefits of higher pay rates and the lower taxes associated with contracting, they must ensure they cannot be classed as an employee. Unfortunately, the legislation is not clear on what constitutes employee status so it is difficult to ensure 100% compliance.
For your guidance we have compiled a list of the key areas contractors should ensure they are clear on in order to avoid the perils of IR35. This is not an exhaustive list and further details can be found at HMRC's Website.
Important Factors to Consider
Right of Substitution: If a contract states that the Consultant has the right to supply a substitute to complete the work this could indicate self-employment. Consideration would be given to factors such as the client reserving the right to reject any substitute and whether the right was exercised on a regular basis.
Right of Control: If a worker is subject to a certain degree of control then he is likely to be deemed an employee. A Consultant who is providing a specific service is expected to be given full control over how, where and when he completes the work, thus suggesting he is self-employed.
Equipment: A self-employed contractor is generally expected to supply the equipment required to complete the project. Where contractors are supplied with equipment by the client, this does point to employment status. Exceptions may be made for equipment which is unique to the project or where security clearance is an issue.
Financial Risk: Contractors who risk their own money to complete a project, for example by purchasing equipment relevant to the project, are normally deemed as self-employed. Investments in ones own training could also point towards self-employment. Employees are not normally expected to spend or risk their own money.
Employee-type Benefits: Contractors who have benefits such as a car park space or use of the canteen facilities, could be deemed an employee. However, the absence of such benefits is unlikely to be conclusive of a self-employed status. The HMRC will take in to account the fact that you may get paid more than your permanent equivalent (if there is one) in order to compensate for your lack of benefits.
Mutuality of Obligation: When a contractor is working regularly for a particular client, whether on new or rolling contracts, then this could be deemed as employment. The reason for this is that it could be interpreted as the client having an obligation to supply that contractor with work after the end of his contract. Where there is no obligation to provide further work from either party, the pointers are towards self-employed status.
As these points demonstrate, there is no cut and dried way to decipher who is genuinely self-employed and who is an employee. This makes working outside IR35 particularly difficult and means contractors must be aware of how their behaviour, as well as their contract terms, may affect their status. Before signing a contract it is advisable to seek legal advice to provide peace of mind when entering any new agreements. The cost of hiring a lawyer is minimal compared to the costs of an HMRC investigation and court case.