So, to recap, I have walked you through what IR35 is and the potential impact of the Private Sector Reform on the UK contracting market. Today I will walk you through what HMRC will assess to determine if you are inside or outside of IR35.
Let me start this section with a short statement “The IR35 legislation is very GREY, the main reason this is such a hot topic is the fact the legislation and the areas it focuses on cannot give you a straight answer”.
Now let’s look at the key areas that you needtoconsider to help you decide if you are inside or outside of IR35. As mentioned in my first article, the status of your IR35 position is determined by the following items:
Let’s dive into the sections and look at how HMRC decide whether you are a PSC contractor or disguised employee:
SUPERVISION DIRECTION AND CONTROL is a complex subject as its actually 3 rules rolled into one, so individually here it is
Supervisionis someone overseeing your work, and by this, we mean watching and guiding you to perform the task correctly and the right standard. This doesn’t include milestone reviews or project progress reviews.
Directionmeans are you being told how to perform the work in a certain way or are you being provided instructions from the client. Working in line with a project delivery plan doesn’t count, they are assessing if someone is telling you how to do the work in a specific order.
Controlassesses if someone is controlling the work you do, do you have autonomy in the work you do or is someone providing you with a task list regularly?
RIGHT OF SUBSTITUTION is the simplest of the rules, if needed could you provide a substitute to the client to continue the delivery of the work. And will the client accept a suitable replacement? Having this listed in the contract is one thing, having a client follow through on taking a substitute is another. To pass this test, both the contract and the client need to agree that this is possible.
MUTUALITY OF OBLIGATION (MOO), this a funny one as it’s based around what can happen, let me explain. MOO in simple terms means, is the client obligated to provide work to you if, for example, the project you are working on is cancelled (like an employee)? And are you obligated to take on this work the client has provided? If not, then MOO doesn’t exist. However, the rules do not state that you cannot accept additional work, and the client cannot offer it. It’s all based around the obligation on both parties to provide and accept the work.
Financial Risk, in short, do you have significant Financial Risk while working this contract. These risks involve:
- Non-payment for the time you are not working
- You will have to correct any errors or failures at your own cost
- Are you required to hold insurance to cover the work you provide as your own cost?
If these elements exist, you can then display that you hold significant Financial Risk within the contract.
PART AND PARCEL OF THE BUSINESS, while this isn’t the most significant area to determine if IR35 applies or not. If a large amount of evidence exists to prove you are part of the business-like and the employee, then it can cause issues if investigated. While a clear definition of what is classed as Part and Parcel of the business, the below can give you a flavour for the elements HMRC will look for:
- Do you have a car park space in the executive car park?
- Do you have a client named business cards (a card from the client with your name on it)?
- Do you wear a client branded uniform?
- Are provided with a company vehicle?
- Do you have a dedicated workspace on the client’s site?
- Are you listed on the client’s internal phone directory?
- Do you take part in any employee benefit schemes or events?
And that’s the long list of how HMRC will assess your IR35 status. So, I hear you ask how do I know if I’m inside or outside? Well, as I mentioned its very grey and hopefully you can see why. My advice is to look over these sections and then review your current working practices, not your contract. If any of the above sounds very different from your current contract, I would seek advice and have a professional review performed or wait for your client to perform the review for you.
As a closing note, you have to be confident that you can provide significant evidence to HMRC that you are treated and act like a contractor and not an employee, in regard to IR35. Next I will explain the penalties for getting your IR35 status wrong, I will also cover the penalties post-April 2021.