What is inside and outside IR35?
Whether an engagement falls inside or outside of IR35 can make a huge difference to how you work as a contractor and how you pay tax.
If you work inside of IR35 that means you’ll be taxed in the same way a PAYE employee. If on the other hand you work outside of IR35, you’ll be able to claim genuine business expenses not available to an employee and take much of your pay via dividends, which can result in paying less income tax.
What passes as working ‘inside IR35’ and ‘outside IR35’ can easily be misunderstood. However, there are three key factors used by the courts to distinguish a contract of employment from one of self-employment, which we’ll explain in this article.
The foundations of IR35 status
The leading status dispute case - Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance 1968 - came many years before IR35 legislation was introduced and formed the basis of the tests that are used today to determine IR35 status.
Since then, case law has evolved and established that the following three factors must be met for a contract of service (employment) to exist:
- Personal Service - the individual is required to provide the services personally.
- Mutuality of Obligations – the engager is obliged to offer work and the individual is obliged to accept the work.
- Control – the level of control the engager has over the supplier of the services is incompatible with self-employment
We will now look at each key factor in more detail so you can understand what they mean and work out whether these factors are present within your engagements.
Personal Service/ Substitution:
What suggests a lack of Personal Service?
- Having an unfettered right to send a substitute – if there are too many restrictions imposed by the engager, the right of substitution will be ineffective
- Referring to the company instead of a specific individual throughout the contract
- Engagement being between two limited companies/LLPs and not with an individual
What suggests that there is a requirement for personal service?
- Being personally named as a party to the agreement
- Having no right to send a substitute
- The client being able to request the removal of an individual for any reason
- Being personally tied into the engagement i.e. signing the contract personally rather than on behalf of your limited company
Mutuality of Obligation:
What suggests a lack of mutual obligations?
- No obligation to accept further work after the contract has ended
- No obligation to accept additional work outside the scope of agreed services
- No obligation to see the engagement through to the end i.e. possibility of early termination
What suggests that there is mutuality of obligation?
- Obligation for agreement to be extended
- Requirement to accept any work provided by the client
- No possibility of early termination
What suggests a lack of control?
- Full autonomy over how the services are carried out
- Freedom to choose location and hours
- No right for the client to exert supervision, direction or control
What suggests that there is control?
- Being managed by the engager
- Being closely monitored, supervised or directed
- Client having input into how, when and where the services are carried out
- Being required to follow client procedures/methodology
If an engagement is missing a requirement for personal service, mutuality of obligations or a right for the engager to control the supplier, the contract cannot be a contract of service and would instead suggest an independent contractor relationship.
The bullet points above are not an extensive list and even if one of the points is missing, it doesn’t necessarily mean you are inside or outside IR35.
There are many aspects of an agreement that need to be taken into consideration when determining IR35 status, including contractual and working terms, and it’s important that each individual engagement is judged entirely on its own merits.
To find out more about IR35, visit our IR35 hub today.
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