What is IR35?

The Intermediaries Legislation (IR35) was created in 2000 to clampdown on 'disguised employment' via the use of 'personal service companies'. A traditional 'employee' would leave their job one day, only to return to work in the same or a similar role shortly afterwards, but work via a limited company structure.

The IR35 rules aim to tax 'disguised employees' who enjoy the favourable tax treatment of their own companies but still work in a similar manner to normal employees.

Off Payroll Rules

Off Payroll rules were implemented in 2017 (public sector) and 2021 (private sector). This major change places the responsibility for working out whether a person is caught by IR35 or not into the hands of the end-client. Originally, limited company contractors self-certified their IR35 status.

Contract Wording and Working Practices

Importantly, the big picture of how an assignment or contract is carried out in practice is taken into account. This means that both the terms of any contracts as well as an individual's working practices must all demonstrate that the person is in business on their own account in order to escape IR35.

There is little point in having a watertight, 'IR35 free' contract between a contractor and the agency unless the terms of the contract match the individual's working practices.

The Key IR35 Factors

Here are the key factors HMRC considers when establishing whether or not an assignment would be deemed to be IR35 caught or not. The first three (control, substitution and mutuality of obligation) are acknowledged by industry experts to be the most important factors.

1. Control & Direction

One of the most important determinants of IR35 status revolves around the extent to which a client controls where, when and how an individual performs their work.

In most cases where professional services are provided, it is important that a contractor can demonstrate a certain amount of autonomy in the way they undertake a project. Employees are typically under the direct supervision and control of their employers, however the truly self-employed will have more influence over how they complete their work.

For a contractor to successfully demonstrate that they are not under the direct supervision and control of the client, both the written contract and working practices must show that the client has no influence over how the contractor performs their services.

Control – Things to Look Out For

Contractual pointers towards a classic 'employment scenario' include:

Indicating that the contractor will be supervised by a line manager or similar company employee
Including work start and end times, and even break times in the contract
Including any 'staff' perks, including provisions for holidays or sickness
Any clauses that specify any rights of control or supervision over the contractor

2. Personal Service / Substitution

The right to provide a substitute in a contractual agreement has long been deemed to be an important factor when demonstrating that a contract assignment falls outside the scope of IR35.

An employee provides their personal services to an employer (client), whereas a business would provide its services to a client, rather than the exclusive services of an individual. As a result, all professionally drawn-up 'IR35 friendly' contracts will include a substitution clause.

The Right of Substitution – Important Points

The right to supply a substitute must be a genuine one, otherwise HMRC may conclude that the clause is a 'sham'
An 'unfettered' right of substitution means that a client must accept a substitute if the contracted worker is unavailable
If a substitute has actually been used during the course of an assignment, this is a strong pointer towards self-employment
Your company should always pay for any costs relating to providing a substitute worker
End clients will often maintain a veto to accepting a substitute, on reasonable grounds

3. Mutuality of Obligation

A mutuality of obligation exists when an employer expects a worker to undertake work when asked to do so, and the worker expects to be given work on a constant basis. For self-employed people, they would expect a client to hire them to undertake a specific task, with no expectation of further work being provided after the initial task expires.

The mutuality of obligation question arises not during the course of the initial contract, but what happens when this contract expires. It is possible that, by having an IT contract renewed many times, then this could be a pointer towards 'employment'.

4. Provision of Equipment

Does the individual use equipment provided by the client, or do they use their own?

5. Financial Risk

How much financial risk does the individual undertake in their work? If all the risk lies with the client, then this is an indicator of 'employment' rather than 'self-employment'.

6. Basis of Payment

The regularity of payment may have some influence on IR35 status. Self-employed people are often paid by the job, rather than a fixed hourly/daily rate.

7. Part & Parcel

To what extent has the individual become part of the organisation? Do they have access to staff facilities, attend staff meetings, attend staff social events or receive staff benefits?

8. Exclusive Service

Does the individual work for just one client, and have their contracts been renewed many times? The self-employed typically work for a number of clients at once.

9. The Intention of the Parties

Even if no formal written contract exists, HMRC would want to determine what the true status of the relationship between the parties is – one of employment or self-employment.

10. In Business On Your Own Account

Here are some typical pointers to behaving and acting like a 'real business' for IR35 purposes:

Do you have multiple clients? This is a strong pointer towards self-employment
Does your company have any income from non-contracting sources?
Do you have your own business website and company email address?
Do you have company stationery, letterheads, a logo, and customised invoices?
Do you use any of your own equipment for contract purposes?
Is your company registered for Value Added Tax (VAT)?
Has your company ever employed anyone else or used sub-contractors?
Do you have business liability and professional indemnity insurance in place?
Has your company invested in training, or improving its marketability?
Does your contracting business ever advertise its services?
Do you have dedicated office space for contract-related work?
Do you regularly tender for contract work or apply for contract positions?
Is your company registered under the Data Protection Act?

IR35 Factors – Final Thoughts

These factors will be used to paint an overall picture of your employment status, and therefore whether an assignment is caught by IR35 or not.

Our recommendations:

Always consult an IR35 contract review specialist to examine each new contract you take on
Consider taking out IR35 insurance in case you are selected for investigation by HMRC
Maintain clear evidence of your self-employed status through business practices
Keep detailed records of all contracts and working arrangements

How RUS Can Help

Our specialist tax team has extensive experience in IR35 compliance and contractor taxation. We can help you:

Review your contracts for IR35 compliance
Assess your employment status and working practices
Structure your business to demonstrate genuine self-employment
Defend HMRC investigations with professional representation
Plan tax-efficient remuneration strategies

Contact our team today for expert guidance on IR35 and contractor taxation matters.

The Key Factors Which Determine Your IR35 Status