The Inland Revenue’s 35th press release in 1999 was titled IR35: Countering Avoidance in the Provision of Personal Services. It was released on the same day as the budget statement and continues to exist. The legislation was designed to tax “disguised employment” at a rate similar to employment. In this context, “disguised employees” refers to workers who receive payments from a client via an intermediary and whose relationship with their client is such that had they been paid directly they would be employees of the client.
If you’re a contractor, freelancer or self-employed I’m in no doubt you will have heard about IR35 but whether we genuinely understand it is another matter! Misinformation spreads by word of mouth and soon urban myths and misnomers spread like the truth. Read on while we clear up some of the most common myths we hear about what factors do and don’t affect your IR35 status.
1. An ‘IR35 Friendly’ Contract = Outside IR35
If only it were as easy as having the correct clause written into your contract. Unfortunately, how your work is carried out is the only evidence that will determine your IR35 status. HMRC can and will speak with your end client, so if there is any dispute between you and them with regards to your working conditions, it will become apparent here.
2. Restricted Working Hours = Inside IR35
As a contractor, you will typically set your working hours and they will not be dictated to you by the end client. However, this is not a water tight indication of your IR35 status, as some industries have Health and Safety considerations when it comes to working hours so that they may be restricted and you can still be considered a self-employed contractor.
3. A ‘Right of Substitution’ Clause = Outside IR35
This is probably one of the main IR35 myths discussed amongst Contractors, as many incorrectly believe it is the only point needed in a Contract to prove self-employment, however, there is now case law evidencing that this is not the case. IR35 status is determined by the manner in which the services are delivered and by the reality of the working relationship with the client.
4. If You Use Client Equipment You Are Inside IR35
It is often assumed that self-employed individuals will always provide both the small and major tools in order to undertake their work but if the major tools are provided by the Client, the individual is really an employee. This is not true. There have been numerous cases where the individual has been provided the tools (and even a uniform) by the Client and has still been proven, in a court of law, to be a self-employed individual and outside IR35.
5. Holiday & Sick Pay
If the contract with the Client confirms eligibility to receive holiday pay and sick pay this would certainly indicate an employee/employer relationship, however, not being entitled to these benefits is conversely not definitive proof that you’re self-employed and outside IR35.
6. Amount of Time Spent on Site Doesn’t Affect IR35 Status
The amount of time you spend on a single end client’s site has no bearing on whether you fall inside or outside of IR35. IR35 is assessed on how you work on a day to day basis, so you have to be able to prove one of the main factors against employment, which includes control of work, right of substitution and mutuality of obligation (MOO).
7. Presence of Another Contract = Outside IR35
Your IR35 status is determined on a contract by contract basis. You could be working to one contract three days a week and another two days a week; if one is found to be inside IR35 and akin to traditional employment, the presence of another contract will hold no bearing upon its status.
We understand that IR35 is a complex and stressful piece of legislation for contractors across the country to get their heads around. It’s always best to avoid the gossip and speak to the professionals when it comes to separating the facts from the fiction.