Shifting Sands: the Problem with IR35
Whether you’re new to contracting or a seasoned professional, the prospect of a new contract is always exciting.
But one potentially problematic matter is IR35. You’ll probably know that it’s going to have an impact on your contract, whether it’s in the private sector or the public sector.
One issue is that the legislation is ever-changing. In April 2017, a major change took place in the public sector. It became the responsibility of the end-client, not the contractor, to determine whether a contract is inside IR35 or outside IR35.
Further changes are ahead. In April 2020, the private sector will follow suit. Though there are still details to be ironed out.
We wanted to explore this ambiguity and how it’s understandable to not be 100% certain. And point out the more obvious factors that can help you work out if your contract is likely to be inside IR35 or not.
Is your contract likely to be inside IR35? What impact will that have on your income?
What we know for sure about IR35
While there’s a lot of grey areas around IR35, there’s certainly some criteria that you can measure your contract against. Knowing these will give you a better picture regarding the IR35 status of your contract.
Does the contractor have a right to substitute?
A contract with a legitimate substitute clause has a better chance of being considered outside of IR35. As such, it’s worth asking yourself the following questions:
- Are you obliged to provide your services personally?
- Do you have an unrestricted right to send a qualified substitute to carry out your work?
- Does your client have the right to refuse your substitute?
- Is your right to substitute legitimate?
- Are you responsible for sourcing and paying your substitute and has this been exercised?
Does the contract have mutuality of obligation (MOO)?
A contract with mutuality of obligation (MOO) is more likely to have their contract deemed to be inside of IR35. Consider the following when it comes to the arrangement you have with your client:
- Is your client obligated to provide work? Are you obligated to accept it?
- Is there an obligation to work out termination periods?
- Can you finish up once the work is completed?
- Is payment based on time or the body of work?
- If there isn’t mutuality of obligation, this makes you look more like a contractor than an employee.
What degree of control does your client exercise over you?
If you find yourself being asked by your client to do work in a specific way or to complete tasks outside of your contract, your contract is more likely to be caught inside IR35. When it comes to the level of control your client has over you think of matters such as:Does your client have control over the way the work is completed?
- Do you work in a project or a role?
- Can your client change your work from the original agreement?
- Do you have a choice over your working hours?
- Do you need consent for time off?
- Do you have choice over where your work is carried out?
What other factors could impact your IR35 status?
- Are you treated like an employee, or do you act like one?
- Are you genuinely in business on your own account?
- Do you have any other sources of income?
- Do you carry the financial risk for the contract?
Uncertainty and changes
The above criteria, whist providing useful guidance is not able, in isolation, to determine the IR35 status of your contract.
The purpose of the legislation is to look beyond the contractual relationship and poses the question:
If the services were provided under a contract directly between the client and the worker, would the worker be regarded, for income tax purposes, as an employee of the client?
In case law, the courts consistently comment that this is not a box ticking exercise and it is important that you take account of the relationship as a whole.
It is important as a contractor to take advice on this.
Changes to the public sector
In April 2017, the responsibility of deciding the IR35 status of a contract fell into the hands of the end-client. With this, a degree of uncertainty was created.
Whilst the employment status tests haven’t changed, there can be disagreements between the end-client and the contractor as to the IR35 status of the contract.
After this, contractors in the public sector found the decision to determine the status of their contract taken out of their control. And to complicate matters further, there have been numerous instances of contractors having contracts incorrectly placed inside IR35.
Upcoming changes to the private sector
From April 2020 private sector companies will be responsible for working out the IR35 status of their contract.
What should you do next?
There’s a lot of uncertainty around the IR35 legislation. But this doesn’t mean that you need to feel confused and work everything out for yourself.
We recommend that the best way to get clarity on your contract’s IR35 status is to get your contract reviewed by experts. We can take you through the specific nature of your contract and using our knowledge, help you get a clear picture as to whether your contract is inside or outside of IR35.
If you need clarity or have any questions, we’re here for you. Call us on 01442 353 466 or book a call back and we can speak to you when it’s convenient.
Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis.