What are the minor IR35 status tests
Recruitment agencies want to support contractors into engagements, but are also aware of their compliance responsibilities and liabilities under the new off-payroll working rules.
IR35 status tests are used by HMRC, and the tribunal courts, to assess whether an engagement is inside or outside IR35. Recruiters will probably already be familiar with the three major status tests: control, personal service and mutuality of obligation (MOO).
However, there are also a set of minor IR35 status tests that often come under the microscope if a case goes to tribunal. In these, the contractor’s working practices and the way in which they run their limited company can have a big impact on the outcomes.
In this blog, we take a look at the minor IR35 status tests – what are they, how are they assessed, and how can you support your contractors to comply and evidence with IR35 rules.
It might be helpful to share this blog with your contractors as part of your onboarding process. Or, you could use the information contained here to create a factsheet with a set of guidelines. Your contractors will be grateful for the support!
Business on own account
Contractors should be able to demonstrate that they are running a genuine business. They need to be set up as an independent business providing a service to other businesses. Indicators of this might be:
- a website
- branding, like logos, business cards and letter-headed stationery
- having an office or business premises
- being VAT registered
- holding business insurance, like professional indemnity and public liability cover
- having policies to comply with relevant legislation like health and safety law.
Any form of marketing that the limited company carries out can add to this bulk of evidence, such as advertisements, listings in directories or trade publications. Avoid using client information such as a logo, client email address on business cards, as this would suggest a link that might indicate “disguised employment” to HMRC.
It’s important that your contractors aren’t seen to be taking any benefits from clients that would be associated with employment. They shouldn’t be entitled to holiday pay or sick pay from their clients. They shouldn’t accept bonuses or join the employee pension scheme, and definitely avoid perks like gym memberships – however tempting! It’s okay to use the employee car park, but contractors should use the visitor spots, if available.
Even events like Christmas parties where the client is footing the bill are potentially dangerous territory. If a client invites the contractor to attend such an event, they should pay for their own food, drink, and transport. This might seem OTT, but your contractor doesn’t want a few mince pies to topple their business.
Your contractor should remain as separate as possible to the client’s business. They are not an employee, and all their actions should be in accordance with those of an external visitor. In practice, this might mean:
- wearing a visitor lanyard while on site
- not having a dedicated desk, or accepting equipment like phones or laptops
- not being held to the client’s working hours
- not having line management responsibilities for the client’s employees
This test is sometimes called “part and parcel” – which is an effective way of thinking about it. Would your contractor be seen as “part and parcel” of the client’s business? If they would, they’re straying into inside IR35 territory. Similarly, self-employed contractors should arrange and pay for their own training and upskilling, not join in with the client’s training.
Termination of contract
The contractor’s company should be free to terminate the contract at any point before its end date. Being able to terminate immediately is the best option, IR35-wise. It’s okay for the contract to stipulate a notice period, but this should be a maximum of four weeks. Anything longer might be seen as being inside IR35.
This works the other way around as well – the end client should also have the right to terminate the contract, either immediately or with a set short notice period.
Whilst this is not a key status test, it is important from an IR35 perspective. The larger the potential financial loss, the better the indicator of an outside position. Assessors will be interested in whether the business is shown to have any financial risks. If your contractor is genuinely running a business, there will always be a possibility for lost income. This could be demonstrated through tests like:
- As above, could a client cancel work and leave the contractor with lost income?
If yes, this is a good indicator that the contract is outside IR35.
- If the contractor made a mistake in the course of their work for the client, who would pay to fix it?
To be outside IR35, mistakes should be the responsibility of the contractor and they should assume financial risk for this.
- If the contractor made a mistake and had to do extra work to fix it, would the client pay for the extra time?
To be outside IR35, the contractor should take the hit and fix the work in their own time, at their own expense. They couldn’t make the client pay for the extra hours.
Holding business insurance, which recruiters can provide through our contractor insurance partnership, is a good way for your contractors to demonstrate their awareness that their company is taking on financial risk.
Use of equipment
Contractors providing services through a limited company should use their own equipment, like laptops, phones and any specialist equipment required for the job. Vehicles would also come under this – contractors should never use a car or van provided by the client’s company.
There are some acceptable exclusions to this – for example, if a client requires the contractor to use an internal laptop for security purposes. But this should be the exception, rather than the norm.
Statement of intention
This is where the contract becomes very important. A compliant contract should make clear that this is a “contract for services” that you are providing, not a “contract of service” where you are being employed for any length of time.
It’s also good practice to include a clause that specifically states that “Nothing in this contract shall create an employee/employer relationship between the Service provider and the Client.” While this isn’t a 100% failsafe, particularly if this isn’t what’s reflected in the working practices of the contractor, it’s better to have it. This can be an easy change to make and can provide that extra bit of evidence if other aspects are in balance.
Contractors should not be tied into exclusive relationships with clients and should be free to provide their services to multiple businesses at once. The client should not demand priority to be given to their work over others, as this will form exclusivity.
Having a range of clients shows that the contractor is acting as a business. Recruiters could encourage contractors keen to remain outside IR35 to take on contracts with a few clients concurrently. Contracts should make it clear that the contractor has the right to offer services to other clients during the contract period.
Your contractors should never claim expenses from the client. Any expected incurred expenses on a job should be taken into account when quoting and agreeing fees for projects. The contractor should then pay for things like transport, materials, and hotel stays directly from the accounts of their limited company.
While the length of contract does not really have an impact directly on IR35, a shorter contract is more akin to an outside of IR35 engagement. It does not however, automatically follow that a long contract is more akin to an inside position – it’s all about how the contractor is treated during the engagement that matters.
All contracts should have a clearly stated start and end date, and as long as there remains firm barriers between the contractor and client staff, length of contract doesn’t really matter. Extensions to contracts can be agreed, but again, it’s really important that an end date is stipulated each time.
How can I check my engagement for the minor IR35 status test?
All of the minor status tests are things that could be investigated and deliberated during an IR35 tribunal. Therefore, it’s important that recruiters are aware of this guidance and pass this advice onto their contractors. It’s also a good idea to put your engagements through a status assessment tool, like the Kingsbridge Status Tool. This will give you an independent, expert view of where your contractor stands.
We’ve also put together a blog of Frequently Asked Questions about minor status tests, which might be useful for your contractors.
As another supportive measure, contractors could consider IR35 insurance. Kingsbridge have developed a unique IR35 cover that flexes to cover whichever party HMRC deems liable in the event of an investigation. Recruiters can either encourage their contractors to take out this cover, or invest in Off-Payroll Protect – find out more about our dedicated IR35 insurance options for recruiters here or contact our partnerships team on email@example.com.