IR35 became effective from 6 April 2000. The legislation was designed to deal with “disguised employees”. Disguised employees are individuals believed to be taking advantage of a business structure when they should have been taxed as any other employee.
IR35 remains a difficult and contentious piece of legislation. While there is guidance on whether IR35 applies, the reality is each situation needs to be judged on its merits. All contractors need to be aware of the rules and to understand how to position themselves so that the substance of their working arrangements is taken into consideration.
Some, but not all, of the key issues to be considered include:
Control
A worker will generally not be an employee unless there is a right to exercise control over the worker. This may be a right to control what work is done, where or when it is done, or how it is done. Actual control is not paramount; it is the right of control that is important.
The Right to Get a Substitute or Helper to do the Job
Personal service is an essential element of an employment contract. Does a person have the freedom to choose whether to do the job themselves, or hire somebody else to do it, or provide substantial help? If they do have this freedom, they are probably self-employed.
Mutuality of Obligation
Is your client obliged to find you more work to complete when you have finished the original project? A contractor via a personal service company will do the work they have been contracted to do, completing the project with no expectation of further work. An employee would expect further work to be allocated to them.
Financial Risk
Individuals who risk their own money by, for example, buying assets needed for the job, bearing the running costs, paying for overheads and materials, are almost certainly self-employed. Employees are not usually expected to risk their own capital. Financial risk could also take the form of quoting a fixed price for a job, with the consequent risk of bearing the additional costs if the job overruns. The risk of making a loss is a very strong indicator of self-employment.
Opportunity to Profit
A person whose profit (or loss) depends on the capacity to reduce overheads and organise work effectively may well be self-employed. People who are paid by the job will often be in this position. For example, a person who quotes a fixed price may well be able to complete the task ahead of schedule or at a lower cost than originally envisaged. People who provide their own materials may be able to profit by getting a good price on the materials or by charging more for them.
Length of Engagement
By itself, the length of a particular engagement may have little importance in determining employment status, although it is more likely that an employee will have an open-ended contract.
Part and Parcel of the Organisation
At one time this was considered to be a test of employment or self-employment, but it is now viewed as one factor to be considered with all the others. Establishing whether a person becomes ‘part and parcel’ of a client’s organisation can be a useful indicator in some situations. For example, someone taken on to manage a client’s staff will normally be seen as an integral part of the client’s organisation and this may be seen as a strong indicator of employment.
Employee-type Benefits
The presence, in a contract, of benefits such as paid leave, membership of firm’s pension scheme, right to car park space, canteen facilities and so on is a good indicator that an employment relationship exists. A contract of employment may also contain access to a grievance procedure and the worker may be subject to disciplinary procedures.
