Now that changes to the off-payroll rules have been confirmed for April 2021, many contractors will be wondering what they can do to prepare for it. Despite the one-year reprieve that was granted because of the Coronavirus pandemic, it would be unwise to follow the government’s claim that contractors and end clients don’t need to act before the deadline. Although the responsibility for making IR35 status determinations will pass to the end client, the contractor still needs to understand this process. Where clients are inclined towards an outside determination, it’s possible for the client and contractor to work together to ensure the contract and working arrangements on the assignment reflect this. Where the client is inclined towards an inside determination and the contractor disagrees with this, they will need to understand how the status determination has been arrived at in order to raise a dispute. While our guide to IR35 will give you a good overview of the legislation to date, in this series we’ll guide you through the various steps you need to take in order to prepare for IR35 reform.
IR35 Key Facts
- HMRC does not decide what determines employment status. IR35 is based on historic case law, and HMRC’s criteria is only their interpretation of it.
- IR35 does not apply to the contractor, but to each individual contract.
- The legislation determines whether the contract is ‘for services’ that the contractor provides, or ‘of service’, which would be a contract of employment.
- HMRC has confirmed that the new rules will not be applied retrospectively.
How will my IR35 Status be determined?
HMRC does not stipulate the specific means by which an IR35 determination should be made. This means that end-clients could use CEST or engage the services of an independent professional. Providing the client doesn’t introduce a blanket ban on engaging limited company contractors, which avoids the necessity for carrying out any IR35 assessments, the criteria for arriving at determinations must be based on the Key Status Test.
Key Status Tests
IR35 involves applying three main principles to determine employment status on any given contract. These are ‘Supervision, Direction & Control’; ‘Substitution’ and ‘Mutuality of Obligation.’ These principles examine the way that contractual work is carried out in order to establish the true nature of the relationship between the hiring organisation and the contractor. In the case of a tribunal, a judge will apply these principles to establish if a contract is ‘for service’ or ‘of service.’
Supervision, Direction & Control (SDC)
What degree of control does the client have over what, how, when and where the worker completes the work?
Genuine contractors will exercise a high level of control over their working practice. Typically, they need minimal supervision and won’t be expected to conform to standard working hours at a designated place of work.
Is personal service by the worker required, or can the worker send a substitute in their place?
A contractor has the right to send a substitute in their place and also to engage subcontractors to carry out parts of the contract, if necessary. In contrast, a contract that requires the work to be carried out by a specific individual indicates employee status.
Mutuality of Obligation (MoO)
Is the employer obliged to offer work that the worker is obligated to accept?
Under normal employment terms, there’s an obligation for the employer to provide continuous work and for the employee to accept it. This obligation does not apply to contractors or the companies they work for, and either party can terminate the contract without notice.
HMRCs interpretation of the IR35 Key Status Tests, and of employment law in general, has been shown in many cases to be either arbitrary or inaccurate. HMRC has lost a significant number of tribunal cases. CEST still only asks a maximum of 25 questions - omitting MoO from these - whereas HMRC is obliged to put forward well over 100 questions in an official IR35 enquiry.
An IR35 tribunal will take a broad view of the contractor’s day-to-day working practices to form a ‘hypothetical contract,’ in addition to the written contract. The hypothetical contract considers a wide range of additional factors. This could include the extent that the contractor is part and parcel of the hiring organisation, and to what extent they can demonstrate that they are taking the financial risks associated with being in business on their own account.
The complexity of IR35 legislation means that many end clients are making risk averse decisions that effectively prioritise ‘inside IR35’ determinations rather than evaluating individual contracts. Given the chaos that arrived after public sector changes were enforced three years ago, contractors are understandably concerned about a repeat scenario.
Despite this, the best way to ensure your contracts (and assignments) are outside of IR35 is to ensure they accurately reflect the working practices associated with being in business on your own account. Although this might not prevent your client from determining you inside IR35, it will provide you with the best defence with which to go forward. In our Preparing for IR35 series, we’ll look at the Key Status Tests in more detail to determine their overall importance with regards to recent case law. We’ll also look at practical steps you can take to safeguard your independent status, linking to key information pieces and guides along the way. Make sure you check our news pages regularly for updates relating to the latest IR35 developments.