IR35 -Self-Employed / Employed Status

It is key that all businesses are aware of the legislation surrounding workers, whether they be employed, self employed or temporary / fixed term workers.

UK employment law draws no distinction between full time workers and part-time workers. They both attract the same protections with regards to employment rights. Part-time workers also have a right not to be discriminated against on the grounds of their part-time status. The distinction that is drawn with UK employment law is between employed and self employed workers. This is often a grey area and a potential mindful for small, medium, and large businesses.

It is not sufficient to merely label a worker employed or self-employed and think that will satisfy the revenue. An employer must properly assess the working situation that determines whether the worker is employed or self-employed. If the revenue were to overtake issue with the manner in which the business is treating the worker, they would not look solely at the contract for their status, but they would look behind that to the actual working relationship.

In the late 1990s, a large number of employees, began setting up limited companies, leaving their jobs and returning immediately as a Contractor purely in order to avoid tax. This was a well known practice and often encourage by companies. As a result the government introduced the IR35 legislation as a prevention.

The legislation applies if you carry out work through an intermediary, this is normally a limited company, to an end user where if there were a contract between you personally and the end user than that would be seen as an employment relationship. Potentially the legislation prevents worker using intermediary companies solely to avoid tax. It does not stop genuine freelance workers from establishing intermediary companies and working in that manner. The legislation is, however, a difficult area of law and it is important that companies seek advice at an early stage.

The test of personal service i.e. if the worker was providing service directly to the company would that establish an employment relationship is, a question of fact, and will turn on the appropriate circumstances. There are a number of factors which would go to suggest that a worker would be an employee, these include:

• A provision of equipment – whether the worker provides their own equipment or the company provides it.
•  Length of arrangement – it is more likely that an employee would have an indefinite contract whereas the contractors would normally have a set period.
•  Benefits, do they receive paid leave, pension schemes, medical healthcare etc.
•  Mutual obligations – does the company have an obligation to provide work, and does the worker have an obligation to carry out the work, or are they entitled to decide when they work with the company under no obligation to offer work at a particular stage.
• Control – whilst a self-employed worker may be under some control from the company and not be to the same extent as an employee, the company will need to look at the way in which the service are performed and tasks carried out. Are they set out as required?
•  Substitution – if the worker is allowed to substitute someone in their place, or engage the help of others. If they are then this would be a factor suggesting a self-employed relationship.

These are just some of the factors that can be taken into consideration when considering the status of the worker. The company should seek advice to assist to determine this.

If the company is engaging someone through an intermediary then there are likely to be two contracts involved. The first contract between the intermediary company and the worker are on the second company with a contract between the company and the intermediary for the provision of services. The revenue is most likely to look at the contract between the intermediary and the company, essentially trying to establish whether the company are in fact engaging with an intermediary or whether they are treating someone as an employee but merely using the intermediary arrangement as a method for the worker to evade income tax. There are number of provisions that should be drafted into this contract to ensure that it is IR35 compliance, these include the issues raised above, such as stating quite clearly there is no mutuality or obligations to provide or undertake work, outlining the treatment for taxation and the right to substitute a worker or in your place. Advice should be sought before agreeing an appropriate contract.

If IR35 applies, then income tax and national insurance contributions will be required. The revenue may also charge interest and penalties to the intermediary companies on overdue tax / national insurance contributions.

If the revenue decide that the company has knowingly treated their workers incorrectly i.e. as self-employed, with a view to evading the appropriate tax payments then they may be liable to very significant fines on the company, amongst other sanctions. For this reason the company needs to be very clear on their treatment of workers.