Is My Assignment And Contract Inside or Outside IR35?
How can you guarantee that your contracts and tasks are not part of IR35? Well, the best way is to guarantee that they precisely reveal the working practices that you follow with your clients. What the HMRC will do is to look further beyond your real contract and investigate the working practices you observe on each task if they decide to query your IR35 status.
Take note that because of the COVID-19 outbreak, the scheduled changes for the rules on IR35 in the private sector has been delayed by the government. These changes will be implemented on April 6, 2021, which is a year delayed from its original schedule.
It is important that long-term freelancers and contractors and who are working for a limited company must ensure that their contracts precisely indicate the working methods followed in their tasks. Contracts should be verified for every assignment on renewal. There should also be some clear evidence that can support your status as a self-employed professional.
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Bear in mind that when HMRC conducts investigations, it will not be restricted to the details that are found in the individual contract. HMRC tends to look beyond what was contained in the contract when examining the working practices you follow with your clients. In case HMRC confirms that the relationship is of an employment nature, then they will try to recover all income tax and National Insurance Contributions due for the period wherein the assignment is undertaken.
The Three Main Principles To Decide IR35 Status
Figuring out whether IR35 is applicable to your assignment can be hard. The following are the three key principles that can help you in figuring out your IR35 status:
Supervision, Direction and Control
What is the level of direction, supervision and control do your end-client have with regards to your day to day work as well as how, where, what, and when will you accomplish your contract?
Is it necessary that you have to do the work yourself? Or can you let someone take your place?
Mutuality of Obligation
Is it necessary for the client to give you work, and is it necessary that you have to accept it?
These three principles will remain the same no matter if you work in the private or public sector. You have to prove that they are not applicable to your contract and working practices so you can prevent yourself from being affected by IR35.
Check your contract with an end client. If it is a contract for services, instead of a contract of service, then it does not fall with the scope of IR35 anymore. For instance, if you are sending another person to act as your substitute in performing the services stated in the contract then there is no requirement for personal service, hence, IR35 should not be applied.
Here, we are going to look deeper into these three key principles and know more about its details.
Supervision, Direction, and Control (of the worker)
Supervision, Direction and Control will be used in the verification of employment and could likely put an assignment inside IR35.
Supervision refers to the degree to which your client will supervise your work and if your performance has reached the standard that they have specified.
Direction means that you are being directed by your client on how the assignment will be completed. This can be done by providing you with guidance, instructions, and advice on how the work will be performed. If there is someone that provides you with some direction, then this will coordinate on how the work is accomplished as it progresses.
Control occurs when there is someone directing you on the work you do and how to do it. It also involves the authority to shift you from one assignment to another as priorities change.
These conditions should not be present in a contract. In fact, genuine self-employed contractors and freelancers must have total control over how and when they are going to work and not their client. One of the most important signs of IR35 status is when there is a particular basis on the work that you performed.
Most likely, if you are a contractor then you will be working in a complete job specification. This specification would describe the following:
- The services that you will be doing.
- Where these services will be provided.
- The particular hours in each day over which these services are performed.
Although, it is still possible that the contract can go further. Maybe it will tell you that you have to submit to management guidance, evaluation or monitoring. If you think that you are in this position, then HMRC will probably decide that you are under the control of your client. As a result, they will consider you as an employee rather than a contractor.
Another evaluation for employment is whether or not your company is capable of providing a substitute to do the work. You must be able to send a replacement that can complete the work on your behalf or perhaps reassign the work. When sending a replacement, it must be absolute. this means that it is not so limited to the point that you will be the one performing the work yourself. If you can truly offer a substitute and can do this occasionally, then most probably, the contract can be considered as outside the scope of IR35.
On the other hand, if the client is only concerned about your own appropriateness and skills and no substitute can be provided, then any replacement clause won’t be able to succeed under HMRC scrutiny. If you have to personally offer your services to your client, then this is usually a sign that you are an employee and not self-employed.
Mutuality of Obligation
One of the requirements of being a contractor is the mutuality of obligation. The following are two specific obligations to consider.
- First, the obligation of one party to provide work.
- The second is the obligation of the other party to take the work that is being offered.
Simply put, if you are a contractor, then you should have the freedom to work from one project to another without any obligation to continue working for the client even if the work has been completed.
Also, a contractor has the freedom to terminate a contract part-way through. On the other hand, an employee can only work for one company and is obligated to continue working even if their tasks have been completed.
It would be wise to check your contract to see whether you are allowed to work on other client’s projects simultaneously, or whether the client can prohibit other tasks.
If your contract states exclusivity and obliged you to work for a specific number of hours each week at a particular rate on an ongoing basis as well as requires you to work on anything that the client gives you, then this is an indication that the contract should be inside IR35.
Bear in mind that an IR35-proof contract must indicate that the client has no right to offer you more work and consequently, you are not obliged to take it. This is actually what Mutuality of Obligation is all about. Provisions for extending the contract must be avoided at all times.
Other Factors That Influence The IR35 Status Of A Contract
Aside from the three significant areas that were mentioned above, there are other things that you should be aware of:
How are you being paid?
Typically, contractors receive their payment once their work is done or when project milestones are completed. On the other hand, employees are usually paid on a regular basis. In case your client asks you for a weekly invoice, then it should include all the details of the work that you have completed for a particular period. Also, don’t forget to include the number of hours worked and the rate.
If you are contractually required to only have one client at a time, then you will be considered as an employee and not a contractor.
It is recommended that you should use your own equipment instead of the equipment provided by your client. Except if there are valid reasons such as security, safety, or practicality.
The contract should provide information on where the work will be performed.
If you are involved with your client’s corporate structure, then you could be influenced by IR35. This is applicable even if you only have the slightest involvement, for instance, you are included on the company organisation charts or you are given a security pass so you can enter the client’s building, however, it does not clearly recognise you as a contractor.
If your contract includes confirmed weekly or monthly regular work, then it seems like an employee “contract of services” instead of a self-employed being paid for its professional fees. If the contractor has committed any mistakes during the extent of the contract, then the contractor must correct this in his own time and this must be stated in the contract. If you need to maintain professional indemnity insurance, then this is another indication that you are self-employed instead of an employee.
Employee Type Benefits
Your contract should indicate that pension, sick pay, and holiday are not applicable. The Agency Workers Regulations (AWR), which can influence Contractors using Umbrella Companies, recognises that Agency Workers should be provided with the same benefits as permanent employees. The relation between AWR and IR35 is something worth exploring.
Part and Parcel
If the contractor has a close relationship with the client’s organisation, for instance, they are included in the organisation charts or have employees reporting to them, then they are acting exactly like an employee of the company and the contract could be a failure at IR35. As a contractor or a freelancer, you should try to distance yourself from the client’s corporate structure. Also, you can only take responsibilities that are not part of the project only if it is the industry norm, for instance, safety responsibilities.
Intentions of the Parties
The intentions of the contractor and client or agency must always be specified on the contract as a supplier and customer and not an employer and employee. It is essential that the nature of the work must be precisely described. In case the intentions of both parties, as indicated in the contract, has no similarities on the actual intentions of the parties, then most likely, the written intentions will completely be ignored by HMRC.
The contract should clearly specify that it will be terminated once the project has ended or in case there is a breach of contract.
You should consider doing some investigation in order to know if your client has encountered any IR35 issues in the past.
Other factors that you should consider are the ability to show that you are doing business on your own account. This means that even if you don’t have any staff, premises, or stock, yet you must probably have an office or a home office, a website, insurance, invoices, advertising, business stationery, be VAT registered, as well as have an accountant and other clients.
If you want to be on the safe side, then you should obtain specialist advice on your IR35. The good news is we can provide this service to you, simply get in touch with us and let us know if you need some help.