A majority of contractors won’t regard the year 2000 with such fond memories, not only because we lost our World cup qualifying game to Germany, but because this is the year the intermediary legislation (IR35) was first introduced by Her Majesty’s Revenue & Customs (HMRC).
IR35 is the complex embodiment of a HMRC problem solver, with suspicion, scrutiny and pursuit coursing through its veins. Sound scary? It kind of is. But it can be defined in 5 words: Tackling the ‘disguised employee’ era.
A while back, regular PAYE employees caught onto the fact that self-employed individuals could work more flexible hours, pay less tax, and often charge more for their services.
Upon seeing this, PAYE employees would declare themselves as self-employed on a Friday evening, but return to the exact same role at the exact same desk on Monday morning, reaping the benefits of a self-employment status. This connotes the ‘disguised employee’ label.
This situation caught HMRC’s attention, and in a roundabout way, this is how IR35 commenced. Essentially, the legislation targets illegitimate contractors who should really be regarded as employees, and are just operating via a self-employed status to occupy a more beneficial tax bracket and overall financial incentive.
HMRC have imposed a lengthy checklist of points to adhere with that must be reflected both in a working contract and working practices for a contractor with an ambiguous status, but there are 3 main elements:
1. The Right of Substitution/Personal Service.
This is a key test concerning a contractor’s compliance with IR35. A self-employed contractor enters into a contract to provide a service rather than personal skills, and should therefore be able to provide a substitute or engage a helper to provide the service. An employee would have to provide their services personally. Therefore, if a contractor failed to hypothetically provide a substitute to carry out their work; this would connote an employee status as opposed to self-employed.
In this respect, it is essential to demonstrate that the client has engaged the services of the contractor to provide a specialist service, and that the contractor has autonomy over the way the services are provided. A genuinely self-employed individual is unlikely to be subject to any right of control by the client, an employee on the other hand is generally told what to do and works within a stated time period.
3. Mutuality of Obligation.
Simply explained, an employer will try to make sure that their employees have a continuous supply of work and will also expect the employees to carry out the work when they require. A self-employed individual will do the work they are being contracted to do and will finish with no expectation of further work. If work is regularly given and accepted over a period of time, HMRC may take the view that employee status has been created by custom and habit.
Financial risk; Right of dismissal; Part and parcel of the organisation; Exclusive services, and intention of the two parties are further factors to be taken into consideration to ensure that an engagement falls outside of IR35, but the aforementioned are the three fundamental elements.