With the rollout of IR35 in the private sector just around the corner, it’s never been more important to understand the factors that determine whether an individual is inside or outside of IR35. The trouble is that the client-contractor relationship is complex. This is much more than a tick-box exercises and end clients need to be able to show HMRC that they have taken ‘reasonable care’ in making an accurate determination. This means that blanket determinations are unlikely to cut it, and instead, clients should carefully consider each contractor relationship or role they have in place.
These are some of the key tests that can help you to make the correct determination every time. However, this is an overview rather than an exhaustive list and you should consider full HMRC guidelines before making a decision.
This is perhaps the most famous test of a potential employer-employee relationship. Control can appear in many different guises, including working times, stipulations around breaks or holidays and rules around how work should be carried out and where. A high level of control indicates that a worker is inside IR35.
Largely, an individual who is classed as an employee will be exposed to no financial risk by working as an employee. A contractor who could experience the loss of materials or pay if a contract fails is exposing themselves to financial risk and is likely to be classed as a ‘true’ contractor. Ideally, contractors should invoice at key milestones rather than agreeing on a fixed weekly or monthly sum – this can look like a wage payment to HMRC.
Another key test is the right of substitution. A contractor should have the right to substitute another person in their place to complete any work that makes up a contract agreement. If this right of substitution does not exist then an individual is likely to be considered within IR35.
There have been several significant IR35 court cases recently, particularly surrounding TV presenters. However, there is a whole body of HMRC case law for organisations to consider when making contractor determinations. If a similar role has been reviewed by the courts before, and HMRC have been successful, the outcome is unlikely to change for a very similar role in the future.
Mutuality of obligation simply means that a client is expected to provide work and the contractor is obligated to complete this work. This can be demonstrated by showing a contract or verbal agreement that determines the contractor will work a set number of hours and be obliged to work on whatever task is provided in that time-period. Mutuality of obligation suggests an employer-employee relationship.
Contractors should provide their own work equipment where safe and practical. However, there are reasonable exceptions to this rule. For example, a contractor might use a client laptop for security reasons. If a good business reason cannot be provided, a contractor who does not use their own equipment may be determined to be within IR35.
Struggling to navigate the complexity of IR35 determinations? You’re not alone. That’s why we have partnered with Brookson Legal to develop a complete IR35 solution. Providing expert determinations and best practice advice, we can help you to overcome your off-payroll challenges. Get in touch to find out more.
Join us at Devonshire Terrace on 20th November at 8.30am to 10.30am to hear from IR35 experts and discover solutions to key off-payroll challenges.