We look in-depth at IR35 Off-Payroll Reform and how your temporary workers will be assessed and their status therefore determined.
We’ve advised about the legislation changes, and how to start to prepare for IR35, but this next article looks in-depth at how your temporary workers will be assessed and their employment status therefore determined.
You can already check whether the off-payroll working/IR35 rules will apply to your contractors by using the HMRC’s Check Employment Status for Tax (CEST) tool. But what criteria are behind this tool, and how will your contractor’s status be determined?
There are four main tests to determine whether a contractor falls within the scope of IR35:
If a client controls where, when and how the contractor performs their work, it suggests that the client is exercising the level of control that an employer may have over an employee. Typically this is more likely to occur where a contractor does not provide a specialist service.
Whilst there may be very good health and safety and security reasons for where and when work is carried out, the contractor will need to be able to demonstrate they have autonomy in how they work in order to show the client doesn’t have the level of control that would make the contractor a deemed employee.
2. Personal Service aka Substitution
If the contractor is able to provide a substitute, (i.e. someone to step in to cover the work) or is able to use someone else to perform the task, then it proves that the services being provided are not exclusive to that contractor. It is, of course, a facet of employment that you’re not able to send anyone else to do your job.
All ‘IR35 friendly’ contracts should include a substitution clause but remember, the availability of a substitute must be genuine, and the degree of client consent required may render the clause useless.
3. Mutuality of obligation (MOO)
MOO applies when a client expects a worker to complete work when asked to do so, and the worker has an expectation of a constant supply of work.
If the above criteria are met, then the engagement could be seen to be one having the attributes of employment. It’s worth considering where there may be multiple renewals of a contract for one contractor working with one client. Those who are self-employed would expect to be hired for a specific task with no expectation of further work thereafter.
One of the main complaints about CEST tool is that it does not address this aspect of status.
Employees rarely experience financial loss from being employed. Assets are provided by an employer to enable the employees to carry out their work and if there is any failure to complete tasks correctly, employees are not obliged to rectify matters at their own cost.
If a contractor is exposed to financial risk as a result of their work, such as not getting paid by a client or getting sued for inadequate performance, this would suggest that they are in business on their own account and likely to be self-employed.
Other factors to consider
Although these could be ascertained from the above, it is worth mentioning the following specifically:
- Does the client provide equipment, as they would for employees?
- What is the basis of payment? Per hour, or day, as an employee or per project?
- Is the contractor part of the organisation in terms of management and reporting responsibilities?
- Does the contractor have access to holiday pay, fringe benefits, employer funded facilities, events etc?
- Does the contractor exclusively work for one client?
- Does the contractor have a significant notice period?
Assessing the relationships between your contractors and your clients will be crucial in the run up to the changes in April 2021, especially if many fall within the scope of IR35. It should be remembered that the actual performance of a contract is more important than the written contract, so, if you complete the CEST tool, always keep a note of why you answered the questions as you did.
Next up in this IR35 series we will dive into the financial impact of the IR35 changes, both as an employer and a contractor. In the meantime, if you have any queries please contact Marie Pegram on 01462 687333 or by email firstname.lastname@example.org.
UHY Hacker Young are recruitment sector specialists and provide expert advice on accounting, finance, taxation and business growth. We understand recruitment and can support you through the ever-changing landscape of this fast-paced industry. With IR35 changes around the corner we can help you build a robust system to tackle this challenge, provide payroll support and review your existing contracts with assistance from our network of other recruitment specialists.
For a simple overview about how your contractor’s status will be determined you can watch our short video: IR35 – determining the status of contractors
For more information on the key deadlines and guidance ahead of the changes being introduced on 6th April 2021 please download our IR35 Off-Payroll Reform Guide for Recruitment Businesses: