In determining whether a contract will be caught by IR35 or not, a number of key ‘tests’ are used to establish employment status. None of these tests are conclusive on their own, and a range of additional factors will often be used in order to build a fuller picture. Although the terms of the written contract are important, the contractor’s working practices will be closely examined in order to establish the true nature of their relationship with the end-client. Here we look at the three main Key Status Tests, along with other indicators that are used to decide whether or not IR35 applies.
Right to Substitution
The right to substitution seeks to establish if the working arrangement is a personal one (i.e. the contractor must carry out the work themselves) or if they have the right to send someone else in their place. An employee doesn’t have the right to send someone else to carry out their work, whereas a genuine contractor should be able to send a similarly qualified substitute to deliver services to a client. There should be a right to substitution clause in the contract and it’s also advisable to include some details of how this would work in practice. If there are too many restrictions in terms of client approval, it is unlikely to be viewed as a genuine right of substitution.
Mutuality of Obligation (MOO)
Mutuality of Obligation (MOO) focuses on whether there is an obligation from the client to provide consistent paid work, along with an obligation from a worker to personally carry out this work. This understanding is implicit within an employment relationship, therefore a genuine contract for independent services shouldn’t specify exclusivity, hours of work per week, or an excessive notice period. The contract should state that the work is a one-off project – therefore rolling contracts without start or finish dates are at greater risk of falling inside IR35. There should also be a lack of MOO during the contract, such as no obligation to offer or accept work during periods of shut down for the client as in the Marlen (2011) case. HMRC’s Check Employment Status for Tax (CEST) tool currently omits MOO on the basis that it is automatically present in a contract. This interpretation conflicts with case law, where MOO is often referenced as a key indicator of employment status.
Supervision, Direction and Control (SDC)
Whether a contractor has control over how they carry out their work is one of the most significant factors when determining IR35 status. If a client dictates what, when, where and how the work is carried out, there’s a strong possibility that the contract will fall under SDC. It’s vital that the contractor and the client both agree whether the working arrangement does fall under SDC, and that this is reflected in the contractor’s daily working practices, as well as the contract. For example, exclusivity clauses, start and finish times on particular days and the specification that the contactor must work at a certain location are indicators of SDC, and could risk a contract falling inside IR35.
As well as the three key status tests, there are a number of other factors that can come into play to help give more context, these can include:
- Part & Parcel
If the contractor is strongly integrated into the end client’s business, this could suggest an employment relationship. For example, if the contractor will be managing or training employees, or if they make regular use of the client’s facilities (designated parking space, workspace or onsite canteen/gym facilities) this could be seen as being treated as an employee. - Provision of Equipment
If the contractor is expected to supply their own equipment in order to complete the assignment this would indicate a position outside IR35. Using client laptops, mobile phones and company-owned cars suggests employment. - In Business Factors
For a contractor’s working arrangement to fall outside IR35, it’s important they operate as a business with insurance, a legal structure and VAT registration. It’s also advisable that they have a business presence, such as a company website, letterheads, business cards, and a registered office address. - Number of Clients
Working on a number of different contracts at the same time indicates that a contractor is less likely to be working like an employee, and is therefore outside IR35. - Financial Risk
In a genuine business, opportunities to make a profit and a risk of making a loss should both exist. - Payment
When a contractor is paid by the hour, day or week, this might suggest that the working arrangement has similarities to employment. A fixed project fee is an obvious indicator of self-employment.
There is no one determining factor that will place a contract outside or inside IR35. The range of factors involved can make determination a complex and often confusing process. This highlights the importance of keeping hold of any evidence which might assist in the event of an IR35 investigation. HMRC also offers guidance case studies on how the key status indicators apply in practice.
For more information on what’s happening from April 2021, see our article here. Agencies can ensure they’re prepared for the changes with our Agency Guide to IR35 Reform. What’s important is that contractors act now to ensure that they are protected from the fallout of reform. Amaze Umbrella’s service has undergone rigorous assessment to attain FCSA accreditation, giving you a fully compliant IR35 solution. Our service also offers benefits of employment that permanent staff receive as well as Perkbox* benefits, insurance cover and a seamless on-boarding experience from our first-class customer service team. To speak to a member of the Amaze team see here.
*Perkbox services are available to contractors paying the qualifying service fee. Please contact us for information.