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IR35 is a government legislation that was put into place to combat disguised employment, which is when someone is enjoying the tax benefits of being self-employed, but without taking any of the risks associated with working in this way.
As a contractor, you can either be working inside of IR35, which is when your contract is caught by the legislation or outside of IR35, which means that you are classed as being truly self-employed. For more information, you may find our IR35 hub useful.
To determine the IR35 status of a contract a number of factors are taken into consideration, some of which are detailed below.
The most important thing to remember is that the work set out in your contract must be the actual work that you are carrying out, as you are contractually bound to deliver the service that has been stated in the contract. For an IR35 friendly contract, the work outlined in the contract will have an end date, so, for example, completing a specific project. Ongoing work is generally seen as not IR35 friendly.
Many standard contracts administered through agencies include a clause which stipulates that the contractor is considered to be under the ‘direction, supervision and control’ of the end client. This is exactly the kind of clause that HM Revenue and Customs (HMRC) would consider to be proof that someone is employed rather than self-employed. To be considered outside IR35, the method and manner in which the contractor completes their contract should be at their discretion.
If a contract has an IR35-friendly substitution clause, it basically means that your client will accept a substitute should you be unable to complete the work, and that substitute must be provided by you. If your contract does not state that you have the right of substitution, or that you need to provide the service personally this could point towards the contract being inside IR35.
An example of mutuality of obligation is an employer and employee relationship, as the employee expects the employer to provide ongoing work and the employer expects the employee to complete work on an ongoing basis. IR35-friendly contracts should not include any clause, which implies or dictates an ongoing obligation for either side to provide or complete work.
The ideal IR35-friendly contract would have no notice period as notice periods are reminiscent of an employee and employer relationship where both parties are required to give notice, this is however not always possible. A typical contract which is outside of IR35 will state that the contractor is there to deliver a particular service or project and once completed the contract will end.
A contractor who is working outside of IR35 will normally undergo an element of financial risk by taking on a contract. This could be the cost of new equipment, a training course or professional indemnity insurance to cover the course of the contract.
Contractors who are operating outside of IR35 are paid in the same way as a client would pay a business, which is usually through raising invoices for either a fixed price. Many contractors charge a daily rate and although not ideal this is usually an acceptable form of payment.
A contractor who is working outside of IR35 should not be tied into any sort of exclusivity agreement which limits their ability to provide services to another client.
In an IR35-friendly contract, the client is under no obligation to supply the contractor with the equipment required to complete the project. If such equipment is needed the contractor will purchase it themselves and claim the cost as an expense as long as the equipment is used wholly an exclusively for business purposes.
It should be the intention of both the client and the contractor to remain as two separate parties and this should be outlined in the contract. If the contractor is truly outside of IR35 then it is their intention to not have an employee and employer relationship with their client. The contractor is therefore not entitled to any of the benefits that employees are entitled to such as attending staff parties and having access to staff facilities.
When determining whether your contract is inside or outside of IR35, HMRC wants to essentially evaluate whether you have a client to the business relationship or an employee to employer relationship. The nature of your relationship should be detailed in the contract, which must be an accurate depiction of your working arrangements. When outside of IR35, you are treated as self-employed for tax purposes. However, if you work through your own limited company, you are effectively an employee of this company and therefore are not self-employed.
If you are unsure whether your contract is inside or outside of IR35 then we would always recommend that you have your contract reviewed by a professional. Alternatively, our IR35 Checker is a quick way to get an idea of your contract’s status.
For more information about IR35 or contracting, please get in contact with our new business team on 01253 362 062.