The IR35 legislation is not straight forward and HMRC will consider multiple factors when determining a contractors IR35 status
Here we share with you some key factors that HMRC will consider when making an individual’s status determination statement (SDS):
Substitution
To be caught by IR35 there must be a requirement to provide personal service. The key question here is, if the individual were unavailable (for example on holiday), could he/she get someone else to carry out some or all of the work that needed to be done. If the answer is yes then the role would be considered outside IR35. Consider what evidence would support this:
- Is a substitution clause included in the contract with the PSC? Most agency contracts include this clause but do Clients have
direct contracts with PSCs?
- Have you ever allowed a substitute to be provided by a PSC? If so this evidence should be retained to show that the right of
substitution is a real right and not just theoretical. This may be helpful not only to the contractor in question but to other
contractors who have substitution clauses in their contracts.
- Do you have a written substitution policy? This would be helpful even if there were restrictions on providing a substitute. For
example any substitute must have relevant qualifications and security clearances.
Control
Employees are generally under their employer’s control. Independent contractors show a degree of independence. For a
person to be outside IR35 he/she should demonstrate some independence particularly in relation to how the work is carried
out.
How:
- Schedules of work should specify what needs to be done rather than how it needs to done. Whilst it is acceptable to impose
reasonable guidelines and procedures, such as for health and safety reasons, Clients should be able to demonstrate that
the contractor knows how to do the job without supervision. Checking on the progress of a project or deliverable is not the
same as supervision.
- Training and appraisals are for employees rather than contractors. Use of language is important. For example a project
meeting should not be described as an appraisal.
- The staff handbook is for employees. If there are procedures that contractors need to follow they should be described as
such.
- Generally the more expert a person the less likely they are to be under the control of Clients’ personnel. Contracts should
recognise that a person has been engaged for their expertise. Details of qualifications retained.
When:
- If there is any flexibility as to when the services can be performed this should be recognised in the contract or any guidance
issued to contractors. Where a project is based on milestones or deliverables this is obviously better from an IR35
perspective than simply working 9-5.
Where:
- If, for example, it is allowable to work from home to write up reports, this should be noted.
Financial Risk
Taking financial risk is a strong indicator of self-employment. Any of the following factors are helpful from an IR35 perspective
and are often seen in the contracts with PSCs:
- Provision of own equipment.
- Contractual indemnities – for example being obligated to correct any defective work in own time and at own cost.
- Short or no notice period to terminate.
- Requirement for insurance.
- Payment terms longer than for employee.
- Upside if early completion of project and downside if late.
Integration
Contractors should be easily identifiable as such and any measures made to distinguish them from employees is helpful:
- ID badge.
- No access to staff facilities.
- No staff benefits.
- Different emails.
- Excluded from team meetings (though attend project meetings).
- No appraisals (given or received).
- Excluded from organisation chart (or identified as external).
Exclusivity
Providing services to multiple clients is also helpful from an IR35 perspective. Any contractual restrictions in doing so should be considered. It is more acceptable to say that a PSC shouldn’t spend time on other projects if it will adversely impact the delivery of the services rather than a blanket ban.
Mutuality of Obligation
An independent contractor should not simply be moved from task to task outside the realms of the agreed contract as this is indicative of employment status.
There are many tools out there which are designed to help a client reach an IR35 status determination. HMRC’s Check Employment Status for Tax tool is just one of them, however many contracting industry and professional tax and accounting bodies have pointed out the inherent flaws in the CEST tool.
When making an IR35 status determination, clients should always ensure that its processes and documentation support the IR35 status decision it makes (particularly when the decision is “outside IR35”). That’s why it’s important to choose an IR35 review tool or service that provides you with a full audit trail.
PayStream’s IR35 Review Service, IR35 Comply enables you to manage IR35 throughout your supply chain, all via our innovative portal. It’s quick and easy to use, shares information throughout the supply chain and is supported by our internal team of IR35 experts. From issuing your contractors a login to confirming the contractor's IR35 status, IR35 Comply is the market leading portal.
