As any good accountant will tell you, trying to determine if a contractor or freelancer falls 'inside' or ‘outside‘ of the IR35 legislation is a challenge at the best of times.
It was made even more difficult by government changes in April 2017 applied to the public sector, which mean it's now the end client or the recruitment agency that is responsible for determining IR35 status. Previously, the onus was on the contractor or freelancer.
These changes are set to be rolled out to private sector workers from April 2020* too, adding a whole new layer of complexity to the issue as well as the potential for agencies to be facing significant tax bills for incorrect IR35 decisions made by end clients.
Determining IR35 status - what does HMRC look for?
There are some basic status tests you can look into that may help to determine IR35 status. But if you're looking for a definitive checklist with a straightforward answer, unfortunately IR35 just isn't that simple. Recent court cases involving major celebrities like Eamonn Holmes and Lorraine Kelly are just a couple of examples that illustrate the point.
Below are six key areas we recommend looking at when it comes to determining IR35 status. It's important to note that this list isn't exhaustive – HMRC will look at a wide range of areas to determine employment status – but the points below do give a helpful indication:
- Control: Is the worker free to work as they wish? For example, are they required to work from a certain location or at certain times of the day at the request of the client?
- Financial risk: Is there a personal financial risk incurred as a result of the performance of work duties? Employees rarely risk financial loss by being employed, whereas if a worker buys assets such as PC's, laptops, servers, printers, office equipment or a client fails to pay, a contractor or freelancer will most definitely experience financial loss.
- Substitution: Is there a clause in the contract around using somebody else to perform the task given to the worker? Is someone else allowed to step in and cover the job?
- Provision of equipment: Will the worker be using their own equipment? Sometimes this can be difficult with organisations stipulating that company-owned equipment must be used at all times. Allowances can be made where security measures prohibit the use of someone using their own laptop for example.
- The right of dismissal: Does the worker have a fixed notice period? HMRC will argue that this is like an employee, therefore there should be a provision in the contract for immediate termination should the client choose to do so.
- Employee benefits: In simple terms, receiving holiday pay, sick pay, pension contributions and training courses are all no-go areas. These benefits should only apply to employees of the company – not contractors or freelancers.
How does IR35 work for umbrella workers?
In short, for those who work under an umbrella company, IR35 status is not a factor that needs to be considered.
Compliant umbrella companies like Parasol effectively become the employer for contractors and operate Pay as You Earn (PAYE) income tax and National Insurance contributions.
That means that these workers have nothing to worry about when it comes to IR35 under current law. And when the new changes for IR35 in the private sector come into play from April 2020*, recruiters and agencies placing clients with Parasol won’t need to worry either.
Professional and expert advice
As many of the points above highlight, IR35 is a complex area of employment to navigate and if you have any concerns, it is always best to seek help from a professional adviser to determine employment status.
For support on IR35 and the upcoming changes to legislation, speak to your Parasol account manager. Or if, for some reason, Parasol aren’t yet on your PSL, visit our recruiter page to discover how you can work with us.
* Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis.