In order to address “disguised employment”, the HM Revenue & Customs introduced the IR35 or the “off-payroll working rules”. IR35 evaluates whether a business’s contractors are employees or self-employed whenever they take on work for clients.
If the contractor is “inside IR35”, the government sees the person as an employee. Therefore, they face an income tax and National Insurance burden, just as all employees do. If the person is “outside IR35”, they don’t face these things.
Public Sector vs. Private Sector Rules on Contractors
Different rules apply for contractors of the public and the private sectors.
For contractors of the public sector, the one who hired the person is responsible for identifying whether they fall inside or outside IR35. If the contract is inside IR35, the hirer or the third party who pays the contractor needs to deduct tax and National Insurance contribution (NIC) and report them to HMRC.
For contractors of the private sector, the contractors themselves are responsible for identifying themselves whether they fall inside or outside IR35. If they are inside, they will need to pay the tax and NIC due them.
How to Determine the IR35 Status
Determining whether the IR35 applies to a contract or not is quite tricky, so these questions may help contractors examine their work status for clients.
- How much say does the client have over a work’s completion?
When a contract specifies the time a contractor has to start and finish work, oversees the person’s work excessively, and assigns different tasks that a client sees fit for the contractor, the contract points towards employment. For a contract to fall outside IR35, contractors should have the liberty on how they complete their work.
- Can another person complete the contract?
When a contract specifies that you’re the only one who can complete the task you’re given and has restrictions that essentially mean the contractor has to complete the work themselves, this means that they are employed. For a contract to fall outside IR35, a contractor has to have the option to send a substitute to complete the work instead.
- Is there an obligation for the employer to offer work and for the person to accept it?
The mutuality of obligation (MOO) is an important clause to include in a contract because it determines the self-employed status.
In a self-employed contract, a contractor is working on a project-by-project basis. Once a project has been completed, a contractor has no obligation to work on further tasks and the client also has no obligations to offer them. However, when a person is employed, the client is obliged to offer work, pay the contractor, and expect them to complete it.
Another clause in a contract that indicates it falls outside IR35 is when a contractor can work for other clients simultaneously. When a contract prohibits this, that means the person is an employee and not on self-employed status.
Determining one’s IR35 status can be quite tricky. This is why specific provisions in a contract have to be double-checked to make sure that contractors are really on self-employed status. Some provisions that contractors have to check are work supervision, direction, and control, work substitution, and mutuality of obligation.