How does HMRC determine employment status under IR35?

Andrew Lester Employment Law Specialist

Andrew Lester is our Employment Law specialist here at ORJ Solicitors in Stafford.

Crucial to the determination of whether IR35 applies or not is the question of ‘Whether an individual would (for tax or NICs purposes) have been an employee of the client if they had been working directly for the client?’ If the answer is no then the intermediary and individual will not be caught by the IR35 rules.

Andrew Lester explains the main factors relevant to the determination of an employee’s status for tax and NIC purposes.

But first, if you’ve not come across IR35 before, here’s another article, What is IR35?

HMRC determines the employment status under IR35 by the following points:

• Personal Service – to be an employee the individual must be obliged to provide their services personally. If an individual is entitled to provide a substitute to do the work this can indicate a non-employment relationship.

• Mutuality of obligation- in an employment relationship there must be an obligation on part of the individual to provide his or her work or skill and an obligation on the client to pay for service.

• Right of Control- an employee must be subject to a certain degree of control by the employer, and the way in which the services and tasks are performed. An employee is likely to have set hours each day or week and an independent contractor is likely to have the freedom to work when and where they want.

• Right of Substitution and engagement of helpers- if an individual has a right to send a replacement or engage a helper and the individual has to pay any assistance or replacement would indicate self-employment.

• Provision of own equipment- a self-employed contractor generally provides whatever equipment is necessary for the job.

• Financial Risk- Individuals who risk their own money (for example incurring expenditure on training which is used in subsequent engagements) are less likely to be employees. This can also take the form of quoting fixed prices for a job with the consequent risk of bearing additional costs if the job overruns. Risk of making a loss is strong indicator of self-employment.

• Length of Engagement- it is more likely an employee will have an open ended contract and the contractor will be engaged on project by project basis.

• Employee-type benefits- If an individual is entitled to benefits such as paid leave membership or a pension scheme this is a good indicator of employee status, however absence of such benefits does not indicate self-employment.

A contract will also have a bearing on the tax status, if the operation of such contracts is in accordance with those terms. What contract should I have in place to avoid the risk of IR35 applying?

If you have any questions or require any guidance regarding IR35 or Employment Law, please call Andrew Lester on 01785 223440 or email Andrew.Lester@orj.co.uk who will be more than happy to assist you.