What is IR35?
HMRC introduced the intermediaries legislation (IR35) in April 2000 to address the situation where an individual would be treated as an employee were it not for the fact that they were providing their services through their own limited company. If HMRC investigate a contract and determine it is caught by IR35, then they will calculate a deemed payment treating all income originally received as dividends as salary and demand income tax and national insurance as appropriate. It is crucial therefore that all contractors and consultants operating through a limited company are aware of the legislation and remain legitimately outside of it.
In practice, the interpretation of IR35 in determining status is largely dependent on case law and as such is constantly evolving. HMRC will not only review the contract between the agency and the limited company but, more importantly, actual day to day working practices. The following key areas should be considered in determining compliance.
Substitution and personal service
Whilst an employee will enter into a contract to provide personal skills, a company will enter into a contract to provide services using suitably qualified personnel of their own choosing. They should genuinely be able to provide a substitute if required who must be paid by and answerable to the company which undertook to complete the contract. The company will remain liable for the services provided by the substitute and, whilst the client may retain the right to reasonably veto the substitution, this must ordinarily be based on the relevant skills, qualifications and experience necessary to satisfactorily provide the services or indeed on security grounds. Note that any right to subcontract services will not be considered a right of substitution. A contract without a strong, explicit right of substitution will invariably fail a contract assessment.
The degree of control exercised by a client over the services to be completed as well as how, when and where the individual does the work is crucial. An employee will commonly be supervised and will receive specific instruction about how and when tasks are to be performed. They will normally work set hours and their tasks may vary over time as priorities change. They will in essence be subject to a considerable degree of control. Where a contractor is performing work under a contract for services however, a client should have no right to exercise any direction, control or supervision over the supply of those services. The contractor should retain a reasonable degree of autonomy over their working methods and hours whilst cooperating with the client’s reasonable requests within the scope of the services.
Mutuality of obligation
An employee will regularly be given and accept different assignments and duties over time and expect to receive a continuous supply of work from their employer. A company contracting to provide services would not normally however expect further work on completion of those services. Whilst notice periods are indicative of a mutuality of obligation, reasonable notice periods are considered defensible for IR35 purposes. Contracts for services may have a defined end date or may terminate on the completion of specific tasks or delivery of an assigned project, but it is important that a contractor should have the right to walk away from a contract early if they choose.
There are a number of relevant other factors which may be taken into consideration in determining IR35 status and each case will be determined on its own merits.
Valid businesses will for instance have their own offices, even though they may be home based, be VAT registered, have business insurances, advertise and maintain their own business websites promoting their company’s services, have business cards, provide their own specialised equipment, invest personally in their own training, pay for their own travel between different client sites and take on a financial risk. They will be able to engage other clients and provide services to them concurrently. They may provide extended services to a single client but each assignment will be governed by a different contract negotiated at arm’s length specifying the particular services to be provided and tasks to be performed. And they will not receive payments when services are not provided.
There can be considerable financial consequences of a contract being caught by IR35. The above guide should not be regarded as a substitute for a professional contract assessment and we would recommend that any contractor who has concerns should take advice from a specialist.Share this: