How to show your IR35 status
As you must know by now – and if you don’t then you really, really need to read this blog – the IR35 reforms are due to take place in April 2021, having been delayed from their original launch date of April 2020 due to that pesky business of a global pandemic.
The new reforms do take some of the onus away from you, the contractor, as far as IR35 goes. You will no longer have responsibility for declaring your status, and you will no longer hold tax liability. Instead, your end client will be responsible for deciding your status and producing your Status Determination Statement (SDS), while your fee-payer (usually your end client or recruiter) will hold liability for any taxes owed to HMRC. However, despite this shift, you still have some responsibility to demonstrate that you are outside IR35 so that your client can confidently assign your IR35 status, and HMRC have no reason to question it.
But how do you show you are outside IR35, with no need to be taxed at source like an employee? The best way is by demonstrably complying with the main status tests which are the aspects of your engagement that a judge would examine if you had to defend your IR35 status at tribunal.
Mutuality of Obligation
Mutuality of Obligation (or MOO as it’s more affectionately known) is one of the more interesting status tests, if such a thing can be said to exist. Firstly, because HMRC decided to leave it out of their Check Employment Status for Tax (CEST) tool. Secondly, because in 2019 HMRC lost two appeals in the space of a week because of it.
This is because HMRC regularly reduce MOO down to what is known as the “irreducible minimum”. This means they see MOO as existing in any circumstance where the client is obliged to pay the contractor in exchange for the contractor’s time and skill. However, that effectively means MOO exists in any paid engagement, whether contractor or employee, and it’s due to this faulty logic that they decided to leave MOO out of CEST.
In actual fact, MOO is much more nuanced and can be demonstrated very clearly and easily through your contract and working practices. In actual fact, MOO asks are you, as a contractor, expected to provide your services consistently or are you free to say no to work? And is your client expected to keep offering you work, or are they free to end your working relationship once your assignment is complete? If you’re both able to say no then MOO is not present and you have a true client-contractor relationship. This can be demonstrated through clear start and end dates in contracts, periods where you have not worked together, or evidence of instance where you have, perhaps turned down work that has been offered.
Client control is another biggie in terms of status tests. Ultimately, it’s all about balance. If your contract or working practices show your client to have too much control over when and how you work then it could look too much like and employer-employee relationship. Naturally, though, this tends to be looked at in terms of what can be reasonably expected of specific industries and roles. For instance, if your role dictates that you need to be on a North Sea oil rig, then you need to be on a North Sea oil rig, that wouldn’t be marked against you.
In general, though, your client shouldn’t be able to dictate how, when or where you work, so your contract shouldn’t contain any clauses to that effect. In terms of working practices, this equates to you setting out the way in which a job will be done, arriving and leaving when you choose (within reason) and having the ability to choose your working days without permission. If you feel your contract or practices gives your client too much control, take the time to chat with them about IR35 and negotiate changes to ensure there’s no ambiguity.
Right of substitution
Right of substitution, also known as personal service, is the third main status test. It refers to a contractor having the unfettered right to provide someone else to carry out the work if you are unable to do it yourself for whatever reason. Unfettered here means you can do this without needing permission from your client.
Right of substitution is interesting because you only need to prove that you possess the right, but you don’t have to show that you’ve exercised it. You can do this by ensuring your contracts have a right of substitution clause and lay out how it works in practice, and also that your PSC is named on the contract, rather than you personally. In this way, you are ensuring that it’s clear you’re providing a B2B service, rather than a personal one.
Status determination tools and IR35 insurance
Chances are, you will need to have a chat with your end clients regarding IR35 status and how you are both demonstrating it. Remember, this benefits them too if they can be confident of your status. Another way to add to their confidence is by suggesting they use a status determination tool like Kingsbridge’s IR35 Status Tool in order to get a complete and expert review of your IR35 status, backed by our consultancy team.
A single review costs £50 (excluding VAT), but if you hold Premium IR35 Protect insurance then they can access unlimited reviews of your status. Holding this cover will also take away any risks associated with IR35 status determination as it covers taxes, interest, and penalties arising from a HMRC investigation and flexes to cover the party liable in any given engagement, be it you, your end client or your recruiter. So, your end client can be confident in your status and have no reason to make blanket decisions, while you sit happily outside IR35. Call 01242 808740 to find out more.