What is IR35?
The IR35 legislation applies to individuals who provide their services through an intermediary (usually a personal service company) where the income received for performing the services would have been treated as employment income had the individual contracted directly with the customer (without the intermediary). The tests used in deciding if somebody is employed or self employed are therefore be used in deciding whether an engagement is caught or exempt from the IR35 legislation.
There is no straightforward way to determine whether a IR35 should apply to a worker as there is no distinction between a contract of service (employee) and a contract for service (self employed) in statute – we therefore rely on common law principles (past judgements) to establish the factors which are relevant.
These factors are applied to both the contract under which the services are provided as well as the working practises of the contractor. The main areas looked at include, but are not limited to:
a) What is done – if a client can move the contractor to different areas of higher priorities then this will be an indicator of employment.
b) When it is done – control over when the work is done may be an indicator of employment.
c) Where it is done – when the contractor is required to work at the client’s premises this can be an indicator of control, although if the work can only be done at the client premises, this may not be a factor.
d) How it is done – this is a strong indicator of employment; it permits the client to prescribe the way in which the work is to be carried out. However, the absence of this level of control does not necessarily indicate self-employment, it is unusual for someone of a particular skill to be told how to do their work, but this does not make them self-employed.
An individual who risks their own money, such as buying assets, bearing running costs and paying for overheads, will be self-employed. The risk of not being paid for an invoice would not qualify; this would be viewed as bad luck. Financial risk could also take the form of quoting a fixed price for a job, with the consequent risk of bearing the additional costs if the job overruns.
Basis of payment
Employees tend to be paid by fixed rates, paid weekly, monthly etc. and may also be paid for overtime. Self-employed contractors tend to be paid a fixed sum for a particular job.
Length of Engagement
Long periods working for one client may be typical of an employment but not conclusive. Regular working for the same client may also indicate that there is a single and continuing contract of employment. A period of notice in the contract is more typical of employment contracts, so an absence of a notice period would point towards self-employment. If a period of notice is present, it should only be for a reasonable period.