IR35 Rules for Contractors
Private Sector IR35 reform is set for April 2020 when the public sector rules will be applied to the private sector. Contractors in the private sector will have to determine themselves if they are inside IR35 or not.
There is a lot of criteria to check when seeing if you are IR35 compliant for private sector contracts.
Supervision, Direction, Control – this relates to how much say your client has over how you complete your work. e.g. a contract that specifies things like the time you can start and finish work, or the days you’re required to work, this implies employment. Other elements of an employment contract that HMRC look out for include a client overseeing your work excessively and giving guidance on how to complete it.
Substitution – Does your client only want you? For a contract to fall outside of IR35, you should be able to send a substitute someone who is suitably qualified and skilled to complete the contract. This means the contract should state that someone else can provide their services to complete the work. The clause has to be genuine, you should know which skilled contractors you would ask. If you can’t send someone else, you’re likely to be within IR35.
Mutuality of Obligation - Is there an obligation on the employer’s part to offer work and do you have to accept it? This is called mutuality of obligation, and if it exists, the contract will fall within IR35. In practice, a self-employed contract means working on a project-by-project basis. Once you’ve finished a project, you’re under no obligation to work on further tasks and the client is under no obligation to offer them. You should also consider whether you can work for other clients simultaneously. If a client and contract prohibits that, it points towards you being an employee rather than self-employed.
Equipment- HMRC often try to argue that if equipment is provided by the client, and you don’t use your own, you’re a disguised employee. Ideally, the contractor should provide the equipment used on a project. The contractor should keep receipts for the equipment and demonstrate that they are in charge of upkeeping and maintaining their equipment.
Financial Risk - Self-employed contractors usually take some financial risk, like any business would e.g. buying assets to do a job, funding training to maintain and improve their skill set or accepting a reduced payment for late or unsatisfactory work. There’s usually a requirement to have professional indemnity insurance. Click here to arrange your insurance today
Payment– Self-employed contractors are paid on a project basis, which might mean when the work is completed or at particular project milestones. The agreement on how the contractor is paid should look and feel like those that exist between companies and should not look and feel like a succession of pay-days Clients should be billed by the hour, by the day or by the project.
A business ‘on your own account’ –Essentially this determines whether you’re actually running your business as a business. If you have things like a business website, a dedicated office space, and even employees, you could be seen as operating a business and not offering your services in the same way as an employee.
Intentions of the parties - the contract should make sure the relationship between contractor and client is one of supplier and customer. If HMRC found the actual intended relationship is more like an employee and employer, they’ll ignore the contract. The contractor should stay independent from the clients employees and can be easily identified as a contractor.