Off-payroll working and IR35 is an area that creates a lot of discussion amongst tax advisers and taxpayers, and some confusion too.
Determining Status In Marginal Cases
It will not always be clear-cut as to whether a worker would (ignoring the intermediary) be employed or self-employed. The working arrangement may exhibit some characteristics of employment and some characteristics of self-employment.
There is no single test that provides a definitive answer as to whether a worker is employed or self-employed. Rather it is a case of looking at the characteristics and deciding which way the pendulum falls. There are numerous case law decisions in this area and they can be useful in forming a view.
In reaching a decision, it is necessary to consider a range of factors, including:
the nature of the engager’s (client’s) business;
the nature of the job;
the nature of the contract and written terms; and
the ‘in business on own account’ test.
Nature Of The Client’s Business
In assessing the true nature of the underlying relationship, the starting point is to consider the nature of the client’s business and to build up a picture of the way in which that business operates. As indicated in their guidance in the Employment Status Manual at ESM0503, HMRC considers the following:
the organisational and management structure of the business;
whether the client is a retailer, wholesaler, manufacturer or a firm within
the service industry sector;
the number of employees in the business;
whether any of the work is subcontracted;
whether there are any employees who undertake similar tasks to those
performed by subcontracted workers;
whether the business is office-based, factory-based, or whether the work
is carried out at a number of sites or at the premises of clients; and
whether there are any homeworkers.
This information will not in itself determine the underlying status of the worker – rather, it will set the scene for seeing how the worker fits into the client’s business. The nature of the client’s business provides the backdrop against which the nature of the underlying relationship between the client and the worker can be judged.
Don’t forget to take account of the nature of the client’s business when trying to IR35-proof a contract.
Nature Of The Job
In undertaking an employment status review, HMRC will also consider the nature of the worker’s job and also whether other workers are doing a similar job under similar terms and conditions and, if so, the status of those workers. Particular consideration will be given to the period leading up to the date on which the worker started work for the client, and HMRC will seek to establish whether the worker replaced another worker who was an employee. They will also look to see if the worker was previously an employee of the client who became self-employed without any apparent changes in the terms and conditions.
Be wary of switching from an employee to a contractor without any real change in the job or the associated terms and conditions. Resigning on a Friday and returning on a Monday to continue the job as a contractor is exactly the situation IR35 is designed to address.
As part of a status review, HMRC will also seek to establish the original terms and conditions on which the job was offered and under which the worker was taken on by the client. Consideration will be given to whether the duties undertaken by the worker are an essential, and possibly, continuous, part of the business, and also, whether the worker needed to be trained to do the job.
They will also look to see whether the original terms and conditions offered have changed.