Contractors need to show that they are operating on a genuine business to business basis and should ensure that their end client recognises this. There is no one deciding factor – all factors have to be considered. IR35 continues to cause confusion as much depends on the contractor’s individual circumstances, working practices and the specific contract being carried out.
We have set out below the main points that you should be considering. These factors include:
Control and Management
The right of control and management should be considered. This should include “how, where, what and when” the work is done. There will always potentially be a level of supervision as even a professional person will require some initial briefing from the end client.
However, you should be able to control where you provide your services, including of course from your own premises. You should be able to choose when you work and dictate your own hours. Where the client has the right to control what, when, where and how you carry out your work, such as moving you from job to job this will be an indicator of employment. Where you are required to provide your services, adhering to start and finish times in the day and having specific days that you work etc are also indicators of employment.
To avoid being caught within IR35 the contract and the actual working arrangements should be as free as possible from aspects of control and requirements of where and how you provide your services.
Right of Substitution
The Right of Substitution should be considered. Personal service is an essential element of a contract of employment. The right of substitution is a fundamental status test and if it is genuinely possible to send a substitute there can be no employment. A person who has the freedom to choose whether to do the task themselves or hire somebody else to do it on their behalf (on a reasonably unfettered basis) is probably self employed.
Ideally it should be possible to provide substitutes both “internally” and “externally.” By internally this means a substitute provided from the Personal Service Company which is recognised as impracticable as in the majority of cases it is likely to be only only you! Where there is a right to send an external substitute to provide the services this is likely to prove a stronger argument than if restricted to an internal substitute.
The right of substitution, both internally and externally, should be written into all contracts with the end client acknowledging this. Your Company should pay any substitute. It is important that any clause in the Contract for Services is a genuine right.
The contract clause states the above but it is equally, if not more important, to be able to demonstrate that a substitute has actually been provided and has been paid by the Company.
To avoid being caught within IR35 the right of substitution should be written into all contracts, including the end client acknowledging this, with the Company paying any substitute to help establish your right to substitution.
Mutuality of Obligation
The Mutuality of Obligation (MOO) should be considered. MOO is a complex issue but broadly this means looking to see if any obligation exists for your client to offer work and for you to accept work offered. MOO is a defining feature of employment; if no MOO exists the contract cannot be characterised as a contract of employment and so IR35 will not apply. Although HMRC accepts this when applying this test they will look to see if there is an actual or an implied MOO existing.
The contract must include a clause to demonstrate that no MOO exists. The longer a contract has been in place the more difficult it would be to persuade HMRC there is no MOO, implied or otherwise, and are likely to be more vulnerable to a challenge by HMRC.
To avoid being caught within IR35 the contract should clearly set out what is expected by you as the contractor and where possible no additional work should be done.
Financial Risk/In Business of your Own Account
The financial risk and whether you are in business of your own account should be considered. It is important to demonstrate that a person conducts a business on their own account and has the opportunity of profiting from sound management. This would include bearing the running costs and paying the overheads of the business, such as having your own business telephone line, printed and logo-ed stationery, having your own office, purchasing your own assets, using your own equipment, hiring your own workers etc.
Financial risk could also be taken as quoting a fixed price for a job, with the consequent risk of bearing the additional costs if work overruns. Employees tend to work on fixed rates, paid weekly, monthly etc. and may also be paid for overtime. Contractors tend to be paid a fixed sum for a particular job. If you are paid regular guaranteed weekly or monthly amounts this can be regarded as akin to salary rather than professional fees.
The length of the engagement should also be considered. Regular working for the same client and long periods working for one client may be indicative that there is a single and continuing contract of employment. You should be able to provide your services for others and promote your Company in the market place. Having more than one contract that a contractor is working on strengthens the case for being in business on their own account and the contract should reflect this.
To avoid being caught within IR35 you should be able to satisfy as many of the above aspects as possible. The contract and the actual working arrangements should include working for a fixed price, agreeing to correct defective work at your cost, providing your own insurance cover etc. If you cannot charge a fixed price, invoices should be issued with any expenses included in the rate rather than relying on time sheets. You should also endeavour to have more than one client you are working on at any one time and ensure that the contract does not contain any clauses that prevent you from working for other clients at the same time.
Intention of Parties
The intention of parties should be considered. The contract should always clarify that the intentions of the parties is one of supplier and customer.
To avoid being caught within IR35 the contract should include a clause clearly stating the intention of both parties is that of supplier and customer to strengthen a case in the event of a challenge by HMRC.
Part and Parcel of Organisation
Whether you can be regarded as part and parcel of organisation should be considered. Case law does not support any contention HMRC may make but consideration should be given to whether you manage staff within the organisation or are managed yourself, whether you attend staff meetings (not related to the services being provided by you), whether you appear on the internal phone lists & email addresses, whether you follow similar work patterns and holiday leave as employees of the organisation, whether you join in staff events such as social events, Christmas parties etc and whether you use staff facilities and benefits such as car parks, canteens etc.
To avoid being caught within IR35 the contract and the working practices should not include any of the above.
Provision of Equipment
The use of equipment should be considered. Where practically possible you should use your own equipment rather than that of the client. There will however be occasions where the client requires you to use their equipment, for Health & Safety reasons for example which is acceptable. Whilst this factor alone will not result in an engagement falling within IR35 it is one factor that will be count towards or against the overall decision.
To avoid being caught within IR35 the contract and the actual working arrangements should be able to show that you use your own equipment.
If you hire workers this is a strong indicator of self-employment and shows that you are genuinely in business on your own account.