IR35 off-payroll working legislation: a reminder of the primary IR35 factors
Off-payroll working legislation was introduced into the private sector in April 2021. Here we remind
ourselves of the primary factors to consider when evaluating whether contractors are inside or
outside IR35.
What are the primary IR35 factors?
Off-payroll working was introduced for contractors who engage their services via their own limited
the company, typically known as a Personal Service Company (PSC). It used to be the responsibility of
the contractor to determine their own employment status by assessing their contract and working
practices against what is known as the IR35 intermediaries’ legislation - an ‘outside IR35’ decision
means the contractor pays significantly less tax
" Since the introduction of the Off-payroll working legislation, it is clear that hirers have been risk-averse and decided that the vast majority of the contractors are deemed employees and therefore caught by IR35."
But HMRC believed that the contractors were making the wrong ‘outside IR35’ decision nine times out of ten costing HMRC millions in unpaid taxes.
Since the legislation has been implemented you, the hirer, are responsible for determining the employment status of your contractors and, using reasonable care, ensuring that the decisions are accurate. There are significant financial and reputational risks if HMRC successfully challenge you’re outside IR35 decisions.
Supervision, direction, or control
Assessing the working practices of a contractor is a great way to determine whether they are an independent contractor (outside IR35) or a ‘deemed’ employee (inside IR35) of your company.
This factor relates to the scope of the contractors supervision, direction or control over the services being provided to you. When you have a relatively greater level of control over the services provided by the contractor, it implies that the contractor is most likely to fall inside IR35 and vice versa. This part of the assessment usually answers the ‘how’ and ‘when’ questions. For instance, an independent contractor would be able to decide what was needed for each task, how those needs could be met,
and also set their own timeline to complete tasks.
Mutuality of obligation
Mutuality of obligation refers to the relationship that exists between a worker and their employer. The
employer is obligated to deliver continuous work to its workers on a daily basis. An independent contractor, however, does not expect any further assignments from the hirer after the completion of the assigned work.
Mutuality of obligation therefore looks at the following:
- How the work is offered and accepted
- How often work has been refused
- Whether work is offered in the future
- Continuity of work
Right of substitution
The ‘right of substitution’ allows a contractor to send in a substitute at any time to help or complete work on the assignment.
There are risks for you with such a clause as you do not know who the substitute is although it should be someone with similar skills. Typically, such clauses are either unfettered, where you the hirer cannot decline such a request, or fettered where you can reasonably decline the request.
Having a substitution clause, especially an unfettered one, would help to indicate that your contractor is independent and outside IR35.
Part and parcel of the organisation
This refers to the ongoing working practices that are often overlooked when determining the IR35 status of a contractor. Is the contractor ‘part and parcel’ of your organisation. If they are they will be deemed to be an employee not an independent contractor.
These practices include being part of your phonebook, having a job title similar to employees, having access to stationery and equipment, a work desk, computer, cafeteria, and the place where the work is going to take place, and so on. For example, an independent worker can choose to perform work from any location as long as the work gets done. An employee, however, is obliged to show up at his/her designated workplace no matter what. These practices are important in determining the IR35 status.
Conclusion
The IR35 status decision is not an easy one, having many factors that contribute to it. However, since the introduction of the Off-payroll working legislation, it is clear that hirers have been risk-averse and
decided that the vast majority of the contractors are deemed employees and therefore caught by IR35.
In some instances, hirers increased pay rates to compensate the critical contractors for their additional
tax burden but in the end supply and demand as always re-adjust and dictates pay rates.
