To make sure that your contract does not fall into IR35; you must explicitly and clearly mention any work-related approach that you use with your clients. HMRC is going to be stringent about the working practices in order to assess the status of your IR 35.
This article covers:
- The three main principles to determine the IR35 status.
- Supervision, Direction, and Control (of the worker).
- Mutuality of obligation.
- Any other considerations that may impact the IR35 status of a contract.
The Three Main Principles to Decide IR35 Status
To assess whether or not the IR35 is applicable to your contract is a bit tricky. In order to evaluate it, there are three fundamental principles:
- Supervision, Direction, and Control: What are the extent of the supervision, direction, and control of your client on your work with respect to its details and timings?
- Substitution: Is it mandatory to perform your work duties by yourself or it possible to send a replacement to carry out your work?
- Mutuality of obligation: Is your client required to provide you work and do you must accept any work?
Irrespective of the private and public sector, these principles are applicable to every worker. You are required to show that these principles do not affect your contract and working procedures to prevent the IR35. The contracts for services are not affected by IR35 because, in such contracts, it is possible to provide a substitute (another worker) to complete the work.
Supervision Direction and Control can be seen as metrics for employment. If such metrics appear in your contract, then you can fall in the scope of IR35.
- ‘Supervision’ refers to the degree of your client’s management of your work including how exactly you fulfil your assignment according to their requirements.
- ‘Direction’ refers to how your client handles your work including any guidance, suggestions, instructions, and recommendations to complete an assignment. Such a client would at times, remain in touch about the on-going progress of the assignment.
- ‘Control’ refers to the dictation of a client about how to do your assignment and the methodology required for it. It also mentions the authority or influence of a client to update your tasks with updated priorities.
It is important for contractors and freelancers to ensure that the above-mentioned clauses are never added in their clauses so they can have more freedom in their work.
If you are a contractor, your job specification should cover the following.
- The description of your services.
- Locations where you can offer your services.
- The timings for each day when you can offer those services.
The contract may have other clauses too like you may provide your consent to management monitoring. If you do this then HMRC may establish that you are “controlled” by your client and therefore your status is changed from a contractor to an employee. To prevent this, read our article on the SDC test and determine your IR35 status.
Substitution—the second principle—refers to the understanding with your client that if it is possible for your business to send a substitute for an assignment. The substitute must be able to finish your work (on your behalf). This prerogative has to be rigid .i.e. it must not be necessary for you to complete the work. If possible, send a substitute and then your contract would not fall under IR35.
On the other hand, if the client only requires your skillset and does not accept a substitute, then HMRC may consider otherwise. Bear in mind that if you have provided permission to yo your client to become personally available, then this means that you are more of an employee.
Mutuality of Obligation
Mutuality of obligation is the final principle that classifies you as a contractor. It has two obligations.
- One party is obliged to offer or provide work.
- One party is obliged to undertake the work.
In easier words, a contractor must show that he works on a project-basis and therefore is not compelled to work for the client after a project is finished. A contractor can also cancel a contract in the middle of the project. Conversely, an employee is required to work for a single company and must work on the upcoming assignments.
It must also be determined if your contract permits you to accept and work on other projects from a different client at the same time and whether your client can influence them in any way like forbidding you to work on them.
For a contract to fall under IR35, it must explicitly mention exclusivity and declare that you have to offer work to a client for a fixed number of hours weekly at a predetermined rate for a continuity-basis and it necessitates you to undertake and initiate any work which is offered by the client.
Alternatively, for a contract to not fall under IR35, it must declare that the client is not obliged to provide and offer you further assignments and you are not necessitated to undertake it. Any addition to prolonging the contract is to be avoided.
Any Other Considerations That May Impact the IR35 Status of a Contract
In addition to the above-mentioned principles, you must consider the following factors:
- Pay: Employees receive pay after regular intervals. On the other hand, a contractor gets payment after the completion of the project or after its finishing its milestones. In case a client needs a weekly invoice, it must cover the description of the work along with an hourly rate.
- Alternative work: If your contract restricts you to work with a single client at one time, then you are more likely to be treated as an employee than a contractor.
- Equipment: You should try your best to utilise your own equipment for assignments. However, you may use the equipment of your client if there is a security or safety issue.
- Premises: The contract must mention the location where you have to work.
- Corporate Interaction: You must have no interaction with the corporate arrangement of your client, even by a small margin. For instance, if you have a security pass that grants you access to the client’s office, then you are involved in their corporate structure. In such a case, the IR35 may impact you.
- Financial risks: Regular and fixed work like monthly and weekly in a contract may make the person appear as an employee. To maintain your status as a contractor, you must explicitly have the contract to state that any irregularities can be corrected according to the timings of the contractor.
- Employee Type Benefits: This links to the sick pay, pension, holiday, and any similar clauses which the contract must clarify that are not applicable.
- Distancing from employees: When a contractor is found to be involved in the client structure of an organisation, like they are being reported to by the personnel or find themselves in the charts of the organisation, they may fail the IR35 test because this is an employee-like attitude. Therefore, a contractor must try to refrain from becoming involved in an organisation’s corporate structure.
- Intentions of the parties: The contract must state the intent of both the parties in such a way that they appear as supplier and customer in contrast to an employee and employer. The work must be clearly defined in the contract. If HMRC finds a difference in the real-world intentions of both parties, then it would not consider the written ones. Termination: The contract must mention its termination after the completion of the project or for any violation. The contract should state that it will be terminated at the end of the project or if there is a breach of contract.
- Blacklists: Identify your client’s past history with IR35.
Furthermore, you can also show that you operate your business by presenting a website, VAT registration, invoices, insurances, proof of other clients and, other similar factors.