IR35 Explained: Your Top Questions Answered

This is a guest blog, by REC business partner Markel

Over 20 years ago, the Inland Revenue Press Release 35 announced the arrival of what would give its name as the IR35 legislation. Despite 2 decades passing, the legislation still remains subjective, and to this day there is no definition of what constitutes an employment contract. With all the turmoil Covid brought with the last-minute deferral of the off-payroll working reforms, it is easy to lose sight of what you, as a contractor, should be aware of and what IR35 means. This article seeks to provide answers to frequently asked questions.

Does the length of contract determine whether contractors are inside IR35?

The length of an engagement can be a contributing factor but if there are other factors consistent with a contract for service, then it is not a sole determining factor. In the case of Airfix v Cope, the Tribunal held that there was a “continuing relationship” for 7 years which prevented her carrying on a business on her own account. The reality is the longer the engagement, the weaker the argument for mutuality of obligations. Another disadvantage could be the “part and parcel” test, which looks at how ‘integrated’ into the clients organisation you are affecting your independence as a business. The longer an engagement continues for, the stronger the argument for being part and parcel of the client’s organisation.  

 What are “in-business factors” and why are they important?

Case law (Market Investigations v Minister of Social Security) has determined that there is no exhaustive list and HMRC’s guidance is consistent with this, “this is not a mechanical exercise of running through items on a check list”. However, factors such as equipment, hiring additional helpers, financial risk and opportunity to profit are important considerations in demonstrating you are in business on your own account.

In the first instance, the intention of the contract should be considered. This sets out the basis on which the entirety of the engagement will be led by. Is the intention for it to be a contract for services or a contract of services? The factors of the contract will then determine the true status of the engagement, and although they are considered “secondary factors”, they hold equal importance to support the rest of the contract.

My Client is overseas so am I ‘exempt’ from IR35?

This is a common misconception of the IR35 reforms. Firstly, it is important to establish if the client has a UK presence i.e. do they have an office in the UK? If the answer to that is no then it would be your limited company responsible for determining its own IR35 status and being held accountable for any potential liability.

If my client is a medium/large company and has an obligation to provide me with an SDS does my company hold any liability?

The Legislation at Chapter 10 ITEPA 2003 provides that where the client exceeds the threshold for the small companies exemption then they are responsible for determining the IR35 status of the engagement. It is then the Fee-Payer i.e. the party in the chain that pays your limited company that has the liability unless the client has not taken reasonable care when producing the SDS. In this scenario the liability would then move up the chain to the client. This means that your company holds no liability for incorrectly assessing the IR35 status or for the subsequent liability (except for cases of fraud).

Why can’t I be an office holder?

The Office Holder rules are separate to considering IR35 status. The usual IR35 tests do not apply, rather the test will be whether the role constitutes the position of an office.

In Simple terms the legislation at s5(3) of the Income Tax (Earnings and Pensions) Act 2003 states that where a position is or has been held, you are engaged to fill that position on an interim basis, and a replacement is engaged at the end of your contract, this constitutes the position of an office.

It is entirely possible to be an office holder and provide services via your limited company but it can have a detrimental impact if these are mutually exclusive and not completely split, with the correct tax treatment applied to each.

I provide my own tools/equipment so why am I not self-employed?

Although this is a good factor in demonstrating you are in business on your own account, this is not a sole determining factor and not considered one of the key factors. This should not be overlooked as it can be useful in demonstrating you are in business on your own account.

My contract states that I can send a substitute, but this has never happened in practice, does this matter?

In reality, you might not ever send a substitute but if you have an unfettered right then case law has demonstrated that personal service cannot exist. However, as always with IR35, it is not quite as simple as that. The right must be unfettered (restrictions only on skills, qualifications and experience) and genuine, not simply arbitrary additions that are not applicable or have any relevance in reality merely to avoid the IR35 legislation.

Can I claim expenses travelling to my clients site while on an inside IR35 engagement?

As an ‘inside’ engagement you are treated in essentially the same way as an employee would be. This means the client site would be considered a “permanent place of work” and not claimable on expenses.

If my client has decided that I am inside IR35 do I also need to pay Employers NIC?

If you have been provided with an ‘inside’ SDS, it is the Fee-Payers responsibility to calculate the deemed payment and make the necessary deductions. The payment received by your limited company will be net of tax and NI deductions.