The IR35 rules are anti-avoidance rules, which were introduced with effect from 6 April 2000 in respect of services performed on or after that date. The measures were introduced to target workers predominantly in the IT industry who resigned from their job on a Friday and started in a self-employed capacity on the following Monday in essentially the same role. However, their application is not limited to the IT industry – they potentially apply to any worker who provides his or her services through a personal service company or other intermediary.
The name ‘IR35’ is taken from the number of the HMRC (then the Inland Revenue) press release in which the measures were announced. The rules are also referred to as the ‘intermediaries’ legislation.
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Employed or Self-Employed?
The IR35 rules only bite if by taking the personal service company or other intermediary out of the equation the worker would be an employee of the end client. Unfortunately, the terms ‘employed’ and ‘self-employed’ are more than mere labels. Rather, they reflect the nature of the relationship between the parties. It is not enough for a contractor merely to decide he is self-employed if the true nature of the relationship is one of employer and employee. Nor can a particular status be assumed or taken as given merely from a job title.
In many instances it will be very clear whether a person is an employee or self-employed. However, it is not always clear-cut and currently there is no one single test which gives a definitive answer. Following the Taylor Review on Modern Work Practices, the Government consulted from February to June 2018 on proposals to make the employment status rules for employments rights and tax purposes for individuals and businesses, considering the boundary between those taxed and employees and those taxed as self-employed and examining the merits of a statutory employment test. The consultation proposals are examined in Section 11. However, as things stand at the time of writing, there is no statutory test. Rather, it remains, as has always been the case of looking at the facts of the relationship and deciding on balance whether it has the characteristics of employment or self-employment.
An employee is someone who works under a contract of service whereas a person who is self-employed works under a contract for services. Answering the following questions will provide a preliminary indication of status.
HMRC provide guidance on employment status on the Gov.uk website (see www.gov.uk/employment-status/employee) in which they list the following characteristics of an employee:
- they are required to work regularly unless they are on leave (e.g. on holiday, on sick leave
- or on maternity, paternity, adoption or shared parental leave);
- they are required to do a minimum number of hours and expect to be paid for the time that
- they work;
- a manager or supervisor is responsible for their workload, saying when a piece of work
- should be finished and how it should be done;
- they can’t send someone else to do their work;
- the business deducts tax and National Insurance contributions from their wages;
- they get paid holiday;
- they are entitled to statutory sick pay and maternity or paternity pay;
- they can join the business’s pension scheme;
- the business’s disciplinary and grievance procedures apply to them;
- they work at the business premises or at an address specified by the business;
- their contract sets out redundancy procedure;
- the business provides the materials, tools and equipment for their work;
- they only work for the business, or if they have another job, it is completely different from
- their work for the business;
- their contract, statement of terms and conditions or offer letter (which may be described as an ‘employment contract’) use terms like ‘employer’ and ‘employee’.7
If (ignoring the intermediary) the relationship between the worker and the end client is such that the worker could answer ‘yes’ to most of the above, it is likely that the underlying relationship is one of employment, and therefore a notional contract of service exists, triggering the application of the IR35 rules.
If most of the above do not apply, it is likely that the underlying relationship is one of self-employment and as such IR35 will not apply.
A self-employment worker is someone who runs their business for themselves and who takes
responsibility for its success or failure. HMRC would regard a person as being self-employed
if most of the following are true:
- they are in business for themselves and are responsible for the success or failure of their
- business and can make a profit or a loss;
- they can decide what work they do and when, where or how they do it;
- they can hire someone to do the work;
- they are responsible for fixing unsatisfactory work in their own time;
- they agree a fixed price for their work with their engager – it doesn’t depend on how long
- it takes them to do the job;
- they use their own money to buy business assets, cover running costs and provide the
- tools and equipment that they need for their own work; and
- they can work for more than one client.
In seeking to remain outside IR35, where services are provided via an intermediary, the relationship should be structured such that if the services were provided direct to the client, most of the above would be true. Therefore, agree a fixed price, provide the tools, specify where, when and how the work is undertaken, etc.
Determining Status – Example
Example 1 - Characteristics Of Employment
Jonny is an IT contractor who provides his services through his personal service company J Ltd. For the last year he has been working for A Ltd on a large project. He works on the project full-time at the offices of A Ltd, who provide all the tools and equipment he needs to do the job. He works as part of a large team, which is managed by an employee of A Ltd, to whom Jonny reports. Jonny is contracted to work 35 hours a week. At the end of each month, J Ltd invoices A Ltd for the work done by reference to the hours worked by Jonny at the agreed hourly rate.
Although Jonny is not regarded as an employee of A Ltd and is not on the payroll of A Ltd, if one were to ignore J Ltd (the intermediary), the nature of the relationship between A Ltd (end client) and Jonny (the worker) has the characteristics of employment rather than self-employment. Jonny must do the work himself, he reports to a manager, he works a set number of hours and is paid an hourly rate, he works at the premises of A Ltd and does not provide his own tools. As a result, IR35 is in point.
Example 2 - Characteristics Of Self-Employment
Louie provides IT support through his personal service company, L Ltd. He has a number of clients. He charges a fee for each job and invoices the client when the job is complete. He is under no obligation to take a job on, nor is the client under any obligation to provide work. Louie manages his own jobs and provides his own tools and equipment.
Taking the intermediary, L Ltd, out of the equation, the nature of the relationship between Louie and his various clients is one of self-employment rather than employment. Consequently, IR 35 is not in point.
Making sure that, if one looks through the intermediary, the worker would be regarded as self-employed rather than employed will prevent the IR35 rules from biting. The engagement should be structured such that it exhibits the characteristics of self-employment rather than those of employment.
By Sarah Bradford
This is an excerpt from our popular report IR35: Tax Tips for Contractors for more information, click here.
This article was first printed in Business Tax Insider in September 2018.