IR35: how the status of contractors will be determined

We look in-depth at IR35 Off-Payrol Reform and how your temporary workers will be assessed and their status therefore determined.

IR35: how the status of contractors will be 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 status therefore determined.

As mentioned last week, 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 is behind this tool, and how will your contractor’s status be determined?

The main factors behind IR35 determination

1. Control

This is one of the main criteria to determine IR35 status. If a client controls where, when and how the contractor performs their work, it suggests that the contractor does not provide a specialist service and therefore would be deemed an employee (and therefore inside IR35).

The contractor will need to be able to demonstrate they have autonomy in the way in which they work in order to show the client doesn’t have influence over how they perform their services – both in their working practices and written contract.

2. Substitution

If you, as the agency, are able to provide a substitute for a contractor, someone to step in to cover the work or are able to use someone else to perform the task, then it proves that the services being provided are not exclusive to that individual.

All ‘IR35 friendly’ contracts should include a substitution clause but remember, the availability of a substitute must be genuine, and the client must be in agreement.

3. Mutuality of obligation (MOO)

MOO applies when a client expects a worker to complete work when asked to do so, and the contractor has an expectation of constant work.

If both of the above criteria are met, it would be unlikely to be applied. However, it’s worth considering where there may be multiple renewals of 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.

4. Risk

Employees rarely experience financial loss of being employed. Assets are provided, their payroll is processed at specified intervals etc.

If a contractor could incur a personal financial risk as a result of their work, this would suggest that they are outside of deemed employment, and therefore IR35.

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? Do they have access to benefits, facilities, events etc?
  • Does the contractor exclusively work for one client?
  • Does the contractor have a fixed notice period?

Next steps

Defining your contractors, and your client relationships, within the realm of IR35 will be crucial in the run up to the changes in April. Next up in this series we will dive into how the cost of IR35 can be calculated, both as employer and a contractor. In the meantime, if you have any queries please contact Marie Pegram on 01462 687333 or by email m.pegram@uhy-uk.com.

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