Can a sole trader fall within IR35?

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Emily Coltman FCA investigates questions that accountants have raised about IR35 as it affects their clients.

The question

“I have just taken on a new sole trader CIS client. The previous accountant has advised me they have told the client that as he only works for one person at one location he will fall within IR35 and with the new rules in future he can no longer claim travel expenses.

Am I missing something here or is this muddled thinking?

My understanding is that a sole trader would not fall within IR35. However, my view would be that if he travels to the same location every day he should never have been claiming the travel on the basis it was “regular and predictable”.

Another issue it seems to me would be his employment status. If he has only worked for one person for several years then if that employer was challenged by HMRC there could be employer NI issues which hopefully would impact my client's employer rather than my client.”

Emily's answer

I see three key issues in this question, namely:

  • Whether or not IR35 applies;
  • Whether the travel costs can be claimed;
  • Who would pay any employer’s NI if the client were found to be an employee.

I’ll address each of these in turn.

Does IR35 apply?

I would say not. For IR35 to apply, it is necessary to have an intermediary between the client (the worker) and the engager. The IR35 legislation applies to the payments made by intermediary to the worker. In this case, a sole trader, is legally the same as his/her business. The questioner does not indicate that there is  an intermediary between the sole trader and the engager.

The sole trader could be treated as an employee of the engager, but that would be under employment law, not the IR35 rules.

The relevant IR35 legislation confirms that an intermediary is required. 

HMRC’s relatively new employment status checker, which I’ll look at again in the answer to the third issue, does include an option within the questions for sole traders to check whether they are quasi-employees, despite being billed as checking for IR35 only.

Can the travel expenses be claimed?

The accountant quite rightly uses the phrase “regular and predictable”, which came out of the Dr Samadian case, where a self-employed anaesthetist’s journeys from home to the private hospitals where he regularly worked were disallowed.

As Nichola Ross Martin puts it: “To arrive at this result, the judge had to find a way to get around the ruling in Horton v Young, which had concluded that travel from a home office to building sites was allowable. He did this by deciding that the more permanent nature of the doctor’s different workplaces disallowed travel between them.”

For this client, who travels between home and the same workplace, surely his/her journeys are even more “regular and predictable” than Dr Samadian’s, so even though the “permanent workplace” 24 months / 40% of time rules do not apply to sole traders, were I in this accountant’s shoes then I would not be claiming tax relief on the travel costs for this client.

Who would pay the NI if the client were found to be an employee?

By entering dummy answers into HMRC’s employment status tool, I found that if a sole trader is an employee in all but name (I used the example of where the sole trader is an office holder), the engager is told to operate PAYE for this worker.

Therefore, the engager would be responsible for covering the employer’s NI.

Whether the engager would accept this is another matter and they may ask the client to instead form a limited company, in which case IR35 would almost certainly apply to the company which would be an intermediary for the IR35 rules.

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About Emily Coltman