A Contractor’s Guide to IR35 - Part 2

A Contractor’s Guide to IR35 - Part 2 - Contractor agreeing contract with client and shaking hands.

In A Contractor’s Guide to IR35 - Part 2, we’ll help you to understand how IR35 status is determined.

We'll cover primary factors including personal service, mutuality of obligations and control, as well as secondary factors that can have an influence on IR35 status.

Contractors who do not work through a limited company

For clarification, a contractor does not have to be engaged via a limited company (or partnership), while determining the status of an engagement with a limited company.

Engaging with a self-employed worker (a person offering services not via a limited company), still results in a saving for the end client. This is because payments made to someone who is genuinely self-employed can be made without the engager needing to make NIC and PAYE deductions.

Where a person engaged as a self-employed worker is found by HMRC to be an employee, the responsibility for the unpaid tax and NIC lies with the engaging organisation.

Because of this, some companies will only engage workers through their own company or otherwise urge existing workers to incorporate and return to work via their own company.

When considering the status of an engagement with a limited company, this means deciding a contractor’s IR35 status. When contemplating the engagement of an unincorporated worker, this means considering the worker’s employment status.

How you go about deciding either form of status is incredibly similar.

How is IR35 status determined?

Unfortunately, there is no legal definition of what forms a contract of service (employment) or a contract for services (self-employment).

The question to begin with in determining IR35 status is – do we have a contract of employment?

This is because of the famous ‘Ready Mixed Concrete (South East) Ltd’ (1968) employment status case, where the factors consistent with a contract of employment were identified.

The three main factors that must be present for a contract of service to exist are:

  • Personal service/substitution: The requirement for the worker to perform the services personally (i.e. they cannot send a substitute to do their work).
  • Mutuality of obligations: An obligation to accept work that is offered, and an obligation for the employer to provide work.
  • Control: For the employer to retain a right of control over the worker (i.e. the employer can decide how and when the employee does the work).

If one or more of these elements are missing, a contract of service (employment) cannot exist. We will now look at each of these factors in more detail.

Personal service/substitution

Where a worker is required to provide the services personally and is not able to send a substitute, this suggests a contract of service (employment). If a substitute can be sent to do the work, it cannot be a contract of service.

The right to send a substitute should be absolute and not overly restricted, to be effective in demonstrating a lack of personal service. This means the client or agency should only be able to refuse a substitute on certain grounds.

You should be looking for a contract to include:

  • A clear right for the contractor to provide (not ‘offer’) a substitute.
  • The client’s grounds for refusal should be limited to no more than a lack of skills, experience and qualification (and possibly security clearance).
  • The contractor stays in the contractual chain and is responsible for the engagement and payment of the substitute.
  • The contractor remains accountable for any handover costs – however there should be no requirement for a handover to last for a specific period of time. This is up to the contractor to decide. Examples of two-week handover periods being required are simply a barrier to substitution.

Mutuality of obligations

There are two areas to be considered under mutuality of obligations:

  1. Whether there is an obligation for one party to offer work, and if offered, whether there is an obligation for the other to accept (often referred to as ongoing mutuality).
  2. Whether there is mutuality within the engagement, so whether there is an expectation that the engagement must be seen through to the end by the contractor/service provider.

To fully meet the requirement for a lack of mutuality of obligations, it should be clear that a lack of obligations exists not only regarding ongoing work but also during the contract period.

HMRC’s current opinion is that the provision of services in exchange for payment is sufficient to create mutual obligations between the parties. Although we have never shared this view, a lack of mutual obligations is possibly the hardest area on which to build an argument that an engagement should fall outside IR35.

It’s encouraging to see that there are cases going through the courts which if successful for the taxpayer, may reaffirm conclusions made in cases like Carmichael and Another v National Power (2000) and force HMRC to re-engage with MOO and maybe even include it within their Check of Employment Status for Tax (CEST) tool.


Where the client maintains a right of control over the worker, this indicates a contract of employment. If it can be proven that the client does not have the right to exercise control over the worker, case law rules that you cannot be an employee.

The most important aspect of control is whether the work provider controls the way in which the worker performs the services.

HMRC like to argue the importance of the ‘what’, the ‘where’, and the ‘when’, but it is only when the contractor has control of these factors, that they would highlight these in an IR35 enquiry.

In reality, many engagements will be projects that the client has determined must be undertaken and for practical reasons can only be undertaken on site, within office hours. This is the same for the employee as it is for the independent contractor.

What establishes whether the contractor is free from client control is if the contractor is responsible for how the work is done.

Contracts must have a clause which is unambiguous. A clause which offers only ‘reasonable autonomy’ is not enough to deny the client (or agency) a right of control.

Other IR35 status factors

As well as the three factors outline above - Personal Service/ Substitution, Mutuality of Obligation and Control, there are other factors which demonstrate that you are genuinely ‘in business on your own account’.

The Ready Mixed Concrete case concluded that where all three of these factors are present, a contract of employment exists. This means that when one is absent, it cannot be a contract of employment. Instead, we must have a contract for services.

It was however recognised by the judge that there are cases where these factors alone may not provide a clear indication of whether it is a contract of employment or a contract for services.

Other in business factors like the ownership of significant assets, financial risk and the opportunity to profit, are markers of a contract for services and suggest you are ‘in business on your own account’.

While being able to prove a genuine business operation when determining status is better, these factors do come secondary to the three key factors (Personal Service/ Substitution, Mutuality of Obligation and Control). If for example the three key factors alone do not give a conclusive result, the other in business factors (like ownership of significant assets, financial risk and the opportunity to profit) can be used.

Many Tribunal judges will consider all of these factors in order to see the bigger picture. It is however more than likely that the decision on the IR35 status of an engagement will ultimately be determined by the key factors.

Deciding your IR35 status

If you’re a contractor in the private sector, until the April 2021 reform, determining the IR35 status of an engagement is your responsibility. If HMRC challenge your decision and are successful, the tax liability also lies with you.

In circumstances where HMRC carry out a tax investigation which results in the taxpayer needing to pay more tax, HMRC will seek to understand the taxpayers decision-making process and how they came to determine the wrong status.  

This forms the foundations of HMRC’s penalty regime, however it’s also a helpful framework for you in determining how to go about making your IR35 status decision.

A crucial point to consider is whether you can demonstrate ‘reasonable care’.

Read part 3 of a contractor's guide to IR35 here.

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