How is IR35 status determined?
It’s complicated, but there is one basic rule to bear in mind: does the engagement look and feel like employment? If it does, it is more likely IR35 will apply. To help them understand what ‘looking and feeling like employment’ really means, the courts have come up with three main factors to consider, and a handful of supplementary ones.
The three main factors are:
Personal service / substitution
Are you required to carry out the work yourself, or you can you send a substitute to do it in your place? Employees cannot send a substitute, so being required to offer personal services points towards IR35.
Supervision, Direction, and Control
What degree of supervision, direction and control does your client have over what you do? Do they tell you how to do the work? Employees are controlled by their employer, so the existence of control points towards IR35.
Mutuality of obligation (MOO)
Is your client obliged to offer you work beyond the agreed project, and are you obliged to accept it? Employees and employers have mutual obligations, so the presence of MOO points to IR35.
You’ll need to be able to demonstrate that at least one of these factors does not apply to your contract and working practices to avoid IR35. For example, if you have an unfettered right to send a substitute, IR35 doesn’t apply, regardless of control and MOO.
Sometimes it’s not clear whether the factors above apply or not. In these instances, the following may be taken into consideration:
Part and parcel How integrated into the client business are you? Are you ‘one of the team’ or is it clear to everyone that you work separately? Separation from the client business is a good indicator that IR35 doesn’t apply.
Use of your own equipment Employees use equipment supplied by their employer. Independent contractors use their own equipment. This test doesn’t always work in practice. There are often good reasons – such as safety and security – why an independent contractor would use the client’s equipment.
Financial risk If you make a mistake, do you fix it on your own time, or the client’s? Independent contractors would typically be expected to fix it on their own time.
Did you go to the Christmas Party? This one is sometimes jokingly referred to but there is an important point behind it. Do you attend staff entertainment events, paid for by the client? If so it could be unhelpful for your IR35 status.
In an IR35 tribunal, the judge will consider all these factors and others to try to determine if, were it not for the existence of your limited company, the relationship would be considered employment. If the judge decides that it would, IR35 will be applied.
The above is a very brief overview of how IR35 status is determined. A full explanation of IR35 is available in our guide:
- Fighting IR35
- What's wrong with IR35?
- IR35 Defence
- IR35 news