IR35 Guide: Review a contract for IR35
You'll need to bear with us here - some of this gets quite jargony and theoretical - you may prefer just to call and ask us about it instead.
To assess IR35 status HMRC will construct a notional contract; this contract doesn't really exist but is a theoretical way of evaluating whether, if there were no intermediaries (limited company, agency, etc) involved, the workers relationship with the end-client would be closer to employment or self-employment.
The main three indicators of status are:
IR35 Indicator - Right to substitution clause
Can a substitute be sent if you're sick for a long period, on holiday, or the substitute has certain technical skills required for a particular task? If so, how fettered is that right to substitution? Does the substitute need to be agreed in advance, or is the client simply entitled to refuse a substitute who is found not to have the necessary skills? If a client only allows a substitute after a formal interview and written confirmation it is unlikely to be accepted as a clear right of substitution.
If a right to substitution clause exists then HMRC would try to establish whether or not it was genuine. Has a substitute ever been sent? Who picked up the cost is an absolutely key point. Documented proof will be examined and many freelancers will agree a written procedure with their end-clients on the process for sending a substitute. This will cover access to the building, computer access, adhering to site policies, etc.
IR35 Indicator - Mutuality of obligation (MoO)
This is a complex area of law with subtle variations of interpretation. Broadly it boils down to whether there is an obligation on the client to pay, just as there would be if an employee shows up to work. It would be very difficult to argue that there was an absence of MoO where a contract doesn't allow a client to terminate immediately.
Any reliance on a MoO clause must reflect the real situation. MoO is more likely to keep a freelancer outside IR35 where terms are mirrored within each contract in the supply chain and confirmed separately in writing between the end client and the freelancer.
IR35 Indicator - Control
For IR35 to apply there must be control over how work is done. The broader the contractual objectives and timeframes the better for IR35. A freelancer dealing with issues as they happen within an organisation is in a weak position. Working on set projects, agreeing defined milestones and timeframes and working in your own offices would all be positive indicators of self-employment.
If there is an agency involved then you may not know the details of the upper contract between the agency and end-client. A freelancer may benefit from confirming in writing the reality of arrangements with the end-client
IR35 - Forming An Opinion
If all three of these suggest the freelancer is caught by IR35 then it's unlikely that other factors will have any bearing. If there are aspects of employment and self-employment then other factors like financial risk and being in business on own account will be tested:
- Financial Risk - assessment includes risk of not being paid, sick pay arrangements and employee-type benefits, fixed-price job-costing.
- In Business On Own Account - own office facilities, website, stationery, employees, marketing, training, public & employer liability cover, professional indemnity cover, other projects undertaken, becoming part and parcel of the client organisation.
Once freelancers understand the legislation many are comfortable deciding upon contract status without professional help. Complacency is dangerous as a strong audit trail is essential; all contract assessments should be accurately and honestly documented.
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