IR35: determining employed or self-employed status

To understand the rules known as “IR35” (which come into force for the private sector on 6 April 2021), you need to be aware of the key ‘factors’ which are used to establish your employment status.

These are applicable where:

  • You are an end-client engaging with a worker via an intermediary and the IR35 rules apply – you will be responsible for determining the worker’s employment status.​
  • You are an end-client engaging with a worker directly for personal service (i.e. where there is no intermediary) – you will be responsible for determining the worker’s employment status.  ​
  • You are a worker providing your services via an intermediary to an end-client that is a small private company – you will be responsible for determining your own employment status. ​

These factors have been established based on case law which goes back over many years. Some factors may indicate ‘self-employed’ and others may indicate ‘employed’ behaviour.​

Determining status is complex. The assessment must take into account the hypothetical contract between the worker and the end-client. This means that the actual / expected working practices must be considered alongside any written contracts.

Working practices may change over time therefore we recommend revisiting employment status assessments on a regular basis. 

Key factors to consider

1. Personal service/substitution: is there an obligation on the individual to perform work personally?

The right to provide a substitute in a contractual agreement is an important factor when demonstrating that a worker is truly ‘self-employed’.​

For a worker to be considered ‘self-employed’ then the exclusive personal services of an individual should not be provided. A business should provide its services to a client rather than a worker providing his / her personal services. ​

Factors which may point towards ‘self-employed’ behaviours include:​

  • Substitutes being identified and vetted by the worker’s business.​
  • The worker’s business engaging with and paying the substitute.​
  • The worker is responsible for onboarding and training any substitutes it provides.​
  • Substitution rights which enable a substitute to actually be provided in practice (i.e. the right is real).​
  • The end-client not being able to direct the worker in choosing a substitute.​
  • The end-client not having the right to reject the substitute.  

2. Mutuality of Obligation: is there an obligation on the individual to perform work personally?

For an employed behaviour to exist, there must be an ‘irreducible minimum of mutual obligation’.  This means that the engager is obliged to remunerate the worker, and the worker is obliged to provide his / her skills. As this irreducible minimum could exist in the provision of both self-employed and employed services,  it is not sufficient to determine the true nature of a contract.​

HMRC’s stance is that where personal service is provided under a contract then mutuality of obligation exists automatically.    ​

In general, self-employed workers enter into a contract for services with their clients meaning that they engage with a client to undertake a specific task, with neither party having any expectation of further work being provided after the initial task expires. By contrast, employed workers expect to be provided with regular work on a constant basis and their employer would expect work to be undertaken as and when requested. ​

HMRC argues that “where work is regularly offered and accepted over a period of time a continuous contract of employment may be created.”​

Factors which may point towards ‘employment’ behaviours include:​

  • The inclusion of notice periods within contracts.​
  • Rolling rather than fixed-length contracts with end clients.​
  • New contracts being entered into immediately after an existing contract has ceased.

3. Control and direction: is the individual subject to the control of the engager as to the manner in which the services are provided?

One of the most important factors considers the extent to which a client controls where, when and how an individual performs his work.​

For a worker to be considered ‘self-employed’ they should demonstrate a certain amount of autonomy and influence in the way a project is carried out.​

Factors which may point towards ‘employment’ behaviours include:​

  • Rights of supervision or control over the worker.​
  • Working hours, start, finish, break times, etc. included within the contract.​
  • Provision of ‘staff’ benefits, including holidays, sickness, cars, healthcare.​

Other factors to consider

1. Business on own account: is the end-client engaging with a “real business”? 

Factors to consider may include:​

  • Does it have a client base and is the business actively marketed?​
  • Does it have its own business website, stationery, email, customised invoices, etc.?​
  • Does it operate from its own business premises and use its own equipment? ​
  • Has the business ever employed anyone or engaged with sub-contractors?​
  • Does the business tender for contract work?​
  • Are there exclusivity rights included within the contract?

2. “Part and parcel” of the organisation: how integrated into the end client’s business is the worker?

Factors to consider may include:​

  • Do employees report to the worker?
  • Are they involved in appraisal processes?
  • Does he/she attend training, team meetings, team building, staff parties?
  • Does he/she have access to the staff car park, staff canteen?​

3. Financial risk and opportunity to profit: how much financial risk is the worker’s business exposed to?  ​

If the end-client suffers all of the risk then this would indicate ‘employment’ rather than ‘self-employment’. The structure of payments may also have some influence on employment status determinations.

If a worker is paid on a fixed fee basis rather than at an hourly/daily rate, he/she can make more money if the task is completed quickly and stands to lose profit if the task takes longer than expected. 

Factors to consider may include:​

  • Are invoices paid by the job or on completion of milestones, rather than at a fixed hourly/daily rate?​
  • Is there any negotiation regarding scope, price and terms within which work is carried out? 
  • Who pays for the remediation of unsatisfactory work? ​
  • Is the worker required to rectify unsatisfactory work in their own time?  ​
  • Do workers always submit invoices before they are paid and are there ever bad debts?​
  • Are credit terms comparable with other third-party providers?

4. Own equipment: who provides equipment fundamental to the delivery of a task?

If only “small tools” this is a neutral factor. 

If the worker provides the fundamental equipment required to deliver their work this indicates ‘self-employed’ behaviour however if the end-client provides such equipment then this might point towards ‘employed’ behaviour.​

5. The intention of the parties: if all other factors are evenly balanced then the intention of the parties should be considered​

The intention of the parties when the contract was agreed may determine the employment status however case law has cited that “the parties cannot change a status merely by putting a new label on it”.​

The employment status determination is important as it will dictate when payroll needs to be operated for workers. These rules are important where “workers” provide services via an intermediary or directly to end-clients.     ​

The end-client must show that it has taken reasonable care in determining employment status and it will always be responsible for determining a worker’s status (unless it is a small business operating in the private sector). ​

Check Employment Status tool

HMRC has developed a Check Employment Status for Tax (“CEST”) tool which can be used to assess employment status. CEST has been widely criticised although HMRC will stand by the result returned as long as the information input reflects the actual or expected working practices. It is therefore a good starting point in assessing employment status. 

If you have any queries on this or any other matters relating to the new IR35 legislation, please don’t hesitate to contact us on 01903 234094.

A version of this blog originally appeared on the website of MHA member firm, MHA Tait Walker.