Contractors & Freelancers - Determining IR35 Status

In this article we will cover the main considerations to be aware of in determining whether a contract is in or outside of IR35 (i.e. if inside - considered an employee and not self-employed).

HMRC will look beyond any contract in place and consider the actual working practices being deployed to determine whether a worker is truly self-employed or acting more like an employee.

Contractors/freelancers working on a long-term basis through a limited company will need to make sure that the contracts they have in place really do fall in line with their practical working arrangements.

At renewal, contracts should be checked, and evidence provided to support the contractor’s status as a self-employed party. 

If employment status is determined, all National Insurance and income tax that would have otherwise been paid during the period will be requested by HMRC.

Key principles in determining IR35 status:

1)    Control and direction (degree of supervision) 

How much of a say so does the end client have in how the services are performed and delivered? 

If the end client can direct, control, and instruct how and when a piece of work should be performed, it is likely that the contractor will be deemed as employed under IR35 rules.

To be self-employed, contractors/freelancers should have control over how and when the work is conducted.

For any contractor/freelancer, it’s likely that a job specification will be in place. This will likely contain:

-       Detail of the services to be provided

-       Description of where the services will be provided

-       Hours between which the services should be provided

If there is detail in the contract suggesting that the contractor will be subject to an appraisal procedure and/or monitoring, it is likely that HMRC will see the contractor as an employee, not self-employed.

2)    Ability to substitute

Can the contractor be replaced easily on the job or is the work specific to them? 

As self-employed, the contractor should be able to provide another individual to complete the work. If the contractor can provide a substitute and on occasion does, the agreement is likely to fall outside of IR35.

Where the contract is tied to the personal skillset and attributes of the contractor, then it’s likely that any agreement will be deemed as being one of employment.

3)    Mutuality of obligation

For self-employment to exist there must not be:

-       An obligation for the end client to offer work

-       An obligation for the contractor to accept

A project-to-project arrangement should be in place with there being no obligation for the contract to continue once the task at hand is complete.

A contractor can terminate the agreement mid duration compared to an employee who must continue working, even after the task at hand is complete.

If the agreement specifies exclusivity, defines the number of hours each week that must be worked/at what rate, and stipulates that the contractor must complete any work passed to them, it’s likely that the contract would be seen as indicating an employer/employee relationship (inside IR35). 

A contract considered outside of IR35 would typically state that the client has no obligation to offer further work and that the contractor has no obligation to accept.

Extension provisions should be avoided.

Other points to consider in determining the IR35 status of a contract

i) How payments are made

A contractor will typically obtain payment once the task at hand is completed and/or milestones are attained.

Where invoices are sent at regular intervals, the work at hand should be detailed along with the hours and applicable rate.

ii) Exclusivity

If the agreement obliges the contractor to have one client at a time, it is likely that HMRC would see the contractor as an employee.

iii) Equipment

Unless there are specific reasons to explain why a contractor is using the end client’s equipment, any equipment used by the contractor should typically be provided by themselves.

iv) Involvement within a clients’ “corporate structure”

Involvement within a clients’ “corporate structure” however small, could indicate to HMRC employment status.

For example, having a security pass that does not indicate the contractor as being a contractor, or featuring on a company organisation chart.

v) Financial risks

Guaranteed regular work indicates more of an employee vs employer type relationship.

Errors made by the contractor during the assignment should be fixed within the contractor’s own time – the contract should clearly stipulate this.

Requirements made within the contract to obtain professional indemnity insurance are also an indicator of self-employment.

vi) Benefits

Benefits which are usually awarded to employees should be declared in the contract as not being applicable. For example, pension, sick pay, holiday entitlement.

vii) Integration into the organisation

If the contractor becomes heavenly ingrained into the client’s organisation e.g., via having staff report to them, communicating from a company email address, appearing on organisation charts, it could be deemed that the contractor is behaving like an employee.

The contractor should maintain distance from the organisation and only take on responsibilities as part of the project when it is the norm.

viii) Termination of the contract

The contract should clearly state that the agreement will terminate at the end of the project and/or if there is a breach of the terms.

ix) Demonstrating that as a contractor, one is in business on their own account

Indicators that a contractor is in business include having an office (even at home), evidence of a website, being VAT registered, advertising, invoices, having other clients, and having an accountant.

Concerned about your status or have further questions?

Get in touch with us today for a commitment-free discovery call at help@northhillfinance.com or call 033 3303 0988.