IR35 Employment Status – Employed or Self-EmployedThe Inland Revenue will use the following criteria to ascertain whether a contractor is considered an employee for tax and NIC purposes under the IR35 legislation.
- Personal Service
- Mutuality of Obligation
- Right to Control
- Provision of Own Equipment
- Financial Risk and Opportunity for Profit
- Length of Engagement
- Part and Parcel of the Organisation
- Employee Type Benefits
- Right to Terminate Contract
- Personal Factors
- Mutual Intention
If you can prove you are working on a contract for services rather than a contract of service (employees) using these criteria, then it is likely that this contract is not subject to IR35 legislation.
However, it is the reality of your overall working relationship with your client that will be considered rather than simply what is written in the contract you hold with them. All of the above factors will be taken into consideration, although some will be given more weight than others in determining employment status. Unfortunately there is no single test that can be done to ascertain status under IR35.
Each contract will be considered on an individual basis, and it is therefore possible that workers may find that some of their contracts are that of employment or casual labour, and others point to self employment.
If you wish to discuss in detail how IR35 may affect you then contact us on 0870 288 1883 or email us at enquiries@Idealcontracting.co.uk
a) Personal Service
It is a necessary condition of a contract of service (i.e. employment) that a worker provides services personally. Under a contract for services, the worker is often entitled to a "right of substitution", i.e. supplying another worker to perform the services under the contract. Such a clause will often require that the substitute is suitably qualified and/or experienced.
The right of substitution is therefore a factor pointing towards self-employment. However, if the clause only provides the right to propose a substitute rather than actually sending them, with the final decision left up to the client, this is unlikely to be sufficient evidence or self-employment.
b) Mutuality of Obligation
Certain factors are likely to be present in a contract for services that would not appear in a contract of service. An employee, for example, is not likely to be obliged to correct unsatisfactory work in their own time and at their own expense. An employee will probably have all equipment provided for them, and will be under the control of the client. They will also not have the right to undertake work for any other client at the same time, which a self-employed person operating on a business to business basis is entitled to.
c) Right to Control
Employees are subject to a certain degree of control by the engager (this need not be exercised in practice). If the worker is told how to perform his duties, this is a strong indicator of employment. Under a contract for services, the client has obviously engaged a contractor to supply specific services, so the contractor necessarily has no control over what work is performed, simply how this is/should be carried out.
If the client does not have or exercise a right to control how the worker performs the services that have been requested, this would point towards self-employment. A requirement to perform the services at the client's site is not necessarily an indicator of employment, as this may be necessary in order for the worker to carry out the services (for example if the worker has been asked to assist with infrastructure that can only be accessed via the client's site, possibly for security reasons).
d) Provision of Own Equipment
A self-employed contractor will often provide whatever equipment and materials are required to complete the task, although in itself this is not a decisive factor. In some trades (e.g. carpentry), employees may provide their own equipment for a job. However, the outlay in purchasing this equipment is indicative of self-employment.
e) Financial Risk and Opportunity for Profit
Individuals who risk their own money in undertaking work are likely to be considered self-employed. Expenditure on equipment, materials and training incurred by an individual with a real risk that the investment would not be recovered from income from future engagements is strongly indicative of self-employment, as no employee needs to undertake such a risk in order to obtain work. Similarly, an opportunity to profit from a task through good business management would indicate self-employment.
f) Length of Engagement
By itself, this is unlikely to have much importance in determining the employment status of an individual, although the longer the contract with one particular client the more likely it is that the worker in question is employed.
It is not uncommon for hirers to offer fixed-term contracts of employment or casual labour, so the fact that your contract has a fixed term is not necessarily indicative of self-employment.
g) Part and Parcel of the Organisation
This can be a useful indicator. If a worker is seen by others in the organisation as an integral part of it, this would suggest employment, for example if they are involved in carrying out staff reviews, have a personalised security badge, their own desk or office and car parking space allocated.
h) Employee – Type Benefits
A contract of service (employment) will carry with in certain benefits, some of which (for example paid annual leave) are statutory requirements. These can include membership of company health and pension schemes as well as being subject to disciplinary grievance procedures. A self-employed worker will not ordinarily have access to these benefits, and instead may be remunerated at a higher level than an employee performing similar services in order to compensate for the absence of those benefits.
i) Right to Terminate Contract
Although usually difficult to negotiate out of a contract, due to the fact employers tend toward defined notice periods, a termination clause can again be examined by the Inland Revenue as an indicator of status. If termination is only due to breach, then this would suggest 'self-employment', but is not likely to be a major factor.
j) Personal Factors
It can sometimes be useful to take into account a worker's personal situation, which will have little or nothing to do with the terms of the particular contract in question. For example, if a worker works for a number of different clients throughout the year, and operates in a business-like manner towards obtaining new contracts (e.g. maintaining a website for their services or investing in office equipment and accommodation), this may be taken into account.
k) Mutual Intentions
In cases where other factors are not conclusive in ascertaining status, the intention of the parties may be taken into consideration. However, a stated intention of self-employment will not be considered if the other factors point to employment.