IR35 for Contractors: Employment Status Determination

HMRC will broadly consider 6 key areas when looking to determine your employment status. If you are not comfortable that these factors are supporting your self-employment through your Personal Service Company, but you want to continue engaging as a freelancer or contractor as self-employed and outside the IR35 / Off payroll reforms, then you should now consider whether you need to ask your hirers and recruitment businesses to change:

1. your contractual arrangements, and/or;
2. your working practices.

To evidence decisions hirers and recruitment businesses must produce a Status Determination Statement (SDS) for each role. They are required to provide you with a copy of any such determination.

So what are the key factors to be considered when assessing your employment status?

1. Personal Service – Substitution

One of the most important of the 6 factors when considering employment status is whether or not there is the provision of a personal service.

If you were unavailable to carry on the role, for example because you were sick, would you have the right to get someone else to carry out some or all of the work that needed to be done? If you could substitute then this is a strong indicator of your role being outside IR35. To evidence substitution the following would need to be considered:

A) Has substitution actually occurred; any evidence of this should be kept to show that this does practically happen. This could also be useful evidence for other contractors in similar roles who have right of substitution clauses in their contracts. Similarly you can ask similar freelancers or contractors with the same client if they have any actual substitution in practice to help your position.

B) Is a right of substitution clause included in the contract with your Personal Service Company (PSC)? Agency and hirer contracts with your PSC will need to be checked and potentially revised to reflect the reality.

C) Do you have your own written substitution policy? This could be very helpful as it can support cases where, even though you have the right to substitute, there may be restrictions relating to that substitute holding acceptable qualifications or security clearances which may prevent an acceptable substitute being found quickly.

2. Mutuality of Obligation

An independent freelancer or contractor should not expect to be moved from task to task outside any terms within the agreed schedule of works. Neither should you believe you have to accept any work offered, nor should a hirer expect you to have to accept any new role offered by them. If this expectation existed, this type of relationship would be indicative of employment.

3. Control, Direction and Supervision

If you are operating outside IR35 you should be able to demonstrate some autonomy in relation to the manner in which the work is carried out. You need to consider:

How the work is carried out

A) Schedules of work should specify what needs to be done rather than how it needs to done.

B) Whilst it is acceptable for your hirer to impose reasonable guidelines and procedures, such as for health and safety reasons, your hirer should be able to demonstrate that you know how to do the job without supervision.

C) Checking on the progress of a project or deliverable is not the same as supervision.

D) Training and appraisals are for employees rather than contractors. Use of language is important here; e.g. a project meeting shouldn’t be described as a worker appraisal.

E) The staff handbook is for employees only. If there are procedures that contractors need to follow they should be described as such.

F) The more expert you are the less likely you are to be under the control of hirers’ own staff. Don’t accept anyone undermining your expertise with contractual rights of control, supervision or direction where in reality these can never practically be realistic.

G) Contracts should recognise that you have been engaged for your expertise. Keep details of your qualifications and supply these to your hirer.

When and where the work can be carried out

A) If there is any flexibility as to when the services can be performed this should be recognised in the contract or any guidance issued to you.

B) If you can be moved from site to site without having any ability to determine the order in which you carry out your tasks then this evidences employment. Any contract clauses supporting this should be avoided where possible.

C) Where you have a role is based on targets or deliverables this is far less consistent with employment than simply working on an hourly rate, and so strongly supports your self-employment status.

D) If you are allowed to perform elements of the role at home, for example to write up notes, plans or reports, this can also help support the role being considered one of self-employment.

4. Financial Risk

Taking responsibility for financial risk is a good indicator of self-employment status. The following factors are helpful from an IR35 perspective and are often seen in contracts with PSCs:

A) Provision of your own equipment.

B) Contractual indemnities – for example obligating you to correct any defective work in your own time and at your own cost.

C) Short or no notice period to terminate your project.

D) Requirement for insurance to be held by your PSC.

E) Payment terms longer than for a typical employee.

F) Financial upsides if early completion of the project and downside if completion is late or delayed.

5. In business on your own account – integration

Ideally you should be easily separately identifiable from employees, for example:

A) Using different ID badges.

B) You don’t receive any standard staff benefits.

C) You don’t have the same email domain address as employees.

D) You are excluded from team meetings (although you should of course attend project meetings).

E) You are not the subject of or the deliverer of any formal performance appraisals.

F) You are excluded from organisation chart (or as a minimum identified as external resources).

6. Exclusivity

Providing services to more than one client is helpful to evidence self-employment. Any contractual restrictions imposed on you by any hirer should be carefully considered. It is more acceptable to say that your PSC shouldn’t spend time on other projects if it will adversely impact the delivery of the services to your hirer rather than the hirer issuing a blanket ban on you working elsewhere.

Reasonable care

There is a requirement for your hirers and agencies to take “reasonable care” when assessing status determinations, so they will need to evidence that reasonable care has been taken.

Status determination tools

To evidence an acceptable approach has been taken there are many status determination tools available which are designed to help a hirer or recruitment business reach an IR35 status determination with reasonable care.

HMRC’s Check Employment Status for Tax (CEST) tool is one of them, however, although many hirers are using this, many contracting industry experts and professional tax and accounting bodies have pointed out inherent flaws in the CEST tool.

Crest Plus’s IR35 Plus service enables recruitment businesses and hirers to manage IR35 determination decision communications throughout the supply chain.