Can I prove my contract is outside IR35?
Since the April 2021 changes to IR35 in the private sector, being able to prove your contract is outside IR35 has become more important as it could help you avoid being moved onto your client’s payroll, resulting in a lower take home pay.
As well as your contract, it’s just as important to consider your actual working arrangements when determining IR35 status. For example, there is no point in having a contract that states you have control in how and where your work is done, if in reality, the client you are working with is directing this.
Both your contract and working arrangements must align to prove you are genuinely self-employed and working outside IR35.
How can I prove that I am working outside IR35?
There is no statutory definition of what establishes a contract of service (employment) or a contract for services (self-employment) which can make establishing your IR35 status complex.
The question you need to begin with in proving you’re working outside IR35 is: “Do I have a contract of employment?”
How do you determine if you have a contract of employment?
In the 1968 case of Ready Mixed Concrete (South East) Ltd v The Minister of Pensions and National Insurance, the Judge established the three key factors that make you an employee:
- Control - The engager controls the way in which you do the work.
- Personal Service - You must be required to provide your personal service, meaning no-one else other than you personally will do the work.
- Mutuality of Obligations (MOO) - There is an expectation that work will be offered and accepted.
If all three of these factors are present, the contract is one of ‘service’ – employment - and would therefore suggest that you are working inside IR35.
If however one of these factors is missing, it cannot be a contract of employment and would instead suggest self-employment – working outside IR35.
Mutuality of Obligations (MOO) is considered the most difficult of these three factors to argue therefore it is much better if you can prove that your personal service is not a condition of the engagement and/or that you control how the work is done.
Below, we explain each of the three key factors further.
When a tribunal judge considers the question of control, they will establish whether the client has the right to control how you do your work, rather than if the client has exercised that right.
Given this, it’s essential that your contractual terms show that you have complete autonomy over how the work is carried out and that you are not required to follow client procedures. Stating “reasonable autonomy” will not be enough and of course, the working arrangements need to reflect that in practice.
Sending someone else in your place to complete the work, unless somehow manufactured, would prove that your personal service is not required. It is also possible to refuse personal service without sending a substitute.
When it comes to substitution, having an unrestricted right to substitute demonstrates a lack of personal service. Your client would require the substitute to have the qualifications, skills and experience needed to efficiently complete the work. If the substitute does not meet these requirements, the client should have the right to refuse the substitute.
One of the most important aspects of substitution is that your company remains in the contractual chain. This means being responsible for the substitute, including the payment of the substitute’s fees.
If your company does appoint a substitute, ensure that all your contractual requirements are shown in the agreements with your substitute. For example, if your company is required to have Professional Indemnity insurance of £2 million, ensure that your substitute has the same level of cover. If your company is required to fix faulty work at its own cost, make sure the same clause is in your contract with the substitute.
While we do not often see substitution in action, from an IR35 perspective, simply having the right to substitute is just as important.
Mutuality of Obligation (MOO)
If a contractor is signing a contract to provide services for a set period of time, is there not an expectation that they would see the contract through?
In terms of being obliged to see a contract through - if a contractor has a history of not completing assignments, then offers of work will likely run out.
Still, it’s important to look into the detail: If you’re completing a contract and the work is for 6 months with no deliverables, potentially you could be at the beck and call of the end client, moving from job to job, having your contract renewed until you appear to look like part of the end client’s business. This would not positively reflect a lack of mutual obligations.
If you’re in a six month contract with three months’ notice, once you reach the beginning of month four, you are contractually obliged to complete the term.
In contrast, if you are not obliged to be working for the client on any given day or the client terminates at very short notice and there is no expectation that you will be offered (or accept) other work, this clearly shows there is no mutuality of obligations.
To summarise, the following suggest a lack of mutual obligations:
- No obligation for further work to be offered or accepted.
- No obligation to offer or accept further work outside the scope of arranged services.
- No requirement to be present on any set day.
- No obligation for the agreement to be extended.
As well as the three key factors, there are also secondary factors that can be considered when determining IR35 status.
In business factors
If a contractor is investing in their business or paying for services including:
- liability insurances;
- preparation of business accounts and tax returns;
- marketing to obtain new work opportunities or;
- relevant courses to stay competitive,
this would suggest genuine self-employment.
Factors demonstrating financial risk include:
- Invoicing – this is because invoices can be delayed, disputed or sometimes even unpaid.
- Early termination of contract – contractors may have short notice periods, but even then if the contractor is not given work to do, they will not be paid.
- Correcting substandard work, at the contractor’s own expense.
- Requirement of own equipment – a contractor working for a PSC will possibly buy equipment including a laptop, server, printer and stationery.
To be seen as a genuinely self-employed contractor, it is essential that you can show in business factors. When it comes to financial risk, your level of risk is often defined by the contractual terms of your engagement.
While there is no definitive way of proving your contract is outside IR35, a contract review can certainly help you gain clarification of your IR35 status and demonstrate due diligence to HMRC.
Where there are parts of your contract that could point towards working inside IR35, a tax specialist during a contract review can highlight these and recommend changes.
If you would like to seek a contract review, complete the online form here or call 0345 223 2727 for more information.
The specialist team at Markel Tax, who have been defending IR35 disputes for over 13 years, will be happy to help.
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