IR35 Questions– the big 3 questions all contract reviewers ask!

DON’T FALL FOUL OF IR35 – the big 3 questions all contract reviewers ask!

IR35 will be a familiar term to many contractors, which perhaps causes much confusion and concern.

To recap, IR35 is tax legislation that was introduced in an attempt to prevent individuals reducing their tax liabilities by placing an intermediary, normally a limited company, between themselves and their employer. Typically, an employee would leave their employment on a Friday afternoon and return on the Monday morning to do the same job, but not as an employee. Instead they would be employed by their intermediary with their services being supplied through the intermediary. The intermediary would invoice for the services and receive payment gross. The employee could then structure their remuneration from the intermediary tax-efficiently resulting in higher after-tax income than before. The original employer would also benefit by a reduction in their employer’s national insurance liability.

In simple terms there are three main questions that should be considered when reviewing a contract to establish whether the IR35 legislation applies. The answers to the following questions will give a clearer indication as to whether the contract is in reality with the individual providing the services (inside IR35) or whether the contract is genuinely with the intermediary (outside IR35):

1. Substitution: the contract should allow the intermediary to assign some or all of the assignment to any individual, providing they have the relevant skills, experience and qualifications required for the assignment. This would indicate that it is not a personal service that is being provided and the contract is with the intermediary.

2. Control: the contract should allow the assigned individual to have control over how they undertake the assignment. Ideally no control should be placed on how they carry out the contract specifications. This does not necessarily mean that the intermediary has control over the hours worked at the clients’ premises as, for example, it may be a security hazard to be in the premises outwith certain hours. Instead, more weight should be placed over how the services are provided and ensuring that the assigned individual has the freedom to work and perform the services with minimum supervision.

3. Mutuality of Obligation: is concerned with an obligation to continue services for both parties. For example, in an employment contract, the employer has an obligation to provide work and pay for it and the employee has an obligation to personally do the work. The contract should negate any mutuality of obligation by ensuring that the client is not obliged to offer ongoing contracts or work to the intermediary and the intermediary is not obliged to accept any contracts or work offered.

Tackling the big three questions in a contract is the best starting point of any contract review. However IR35 is a complicated area and it is advisable to seek specialist advice. If you are concerned over any aspect of your contract, are looking for contract advice or a contract review, please contact our specialist contractor team today at contractors@jsca.co.uk or call us on 0131 317 7377.