IR35 status determination questions under the new off-payroll working rules

Public sector organisations and medium and large businesses in the private sector are now responsible for determining IR35 status for their contractors

This has been the case since amended rules came into force in 2021. Throughout the entire history of IR35 until 2017, status determination (and the associated financial risk) was the responsibility of their contractors.

Now, except for small companies with £10.2m annual turnover or less, you’re responsible for IR35 status determination. For you, the days of contractor IR35 self-determination have come to a close.

In this article, we’ll look at when you have to determine who is inside or outside IR35 and the questions you need to ask to complete a status determination statement for each contractor.

What questions do you need to ask when determining IR35 employment status?

The more “no’s” you have to each of these questions, the more likely your contractor is to be inside IR35.

• Is your contractor allowed to send someone else to do the work in their place?

• Does your contractor have the freedom to work wherever they want?

• Can your contractor set their own hours? Do you have no right to dictate the days and times they work?

• Is your contractor allowed to take time off work?

• Can your contractor say “no” to completing a task not covered in your contract?

• Can your contractor terminate the work agreement easily? Can they walk away on no notice or less than 30 days’ notice?

• Does your contractor have their own commercial insurance policy?

• If your contractor messes up, do they pay to put it right?

• Does your contractor have the right to do the work set out in the agreement independently and without direction from you?

For the following questions, a “no” answer means that your contractor is more likely to be outside IR35.

• Are you obliged to give your contractor work and pay for it and are they obliged to complete that work?

• Has the contract ever worked as a permanent member of staff for your company?

• Do you have the right to supervise, manage, discipline, or appraise the contractor or any staff they employ?

• Is the contractor an office holder or have they ever had any higher level managerial or directorial responsibilities within your company?

• Do you invite your contractor to staff nights out and company parties?

• Does your contractor have their parking space, a company name badge, or a locker at your client’s premises?

This is complicated. But arriving at an actual conclusion is even harder.

To get a positive outcome for you and your contractor (“positive” meaning outside IR35), your contractor must have the ability to operate as they please within the remit of your arrangement with them. This needs to be demonstrated not only in the contractual terms of your arrangement but also in their working practices too.

For more information on IR35 determination for employers and how to answer status determination questions, please call CoComply on +44 (0) 203 051 9792, email [email protected] or fill out the form below.

Off-payroll working rules FAQ

When do you need to complete a status determination statement?

You need to assess the employment status of independent contractors if there are one or more intermediaries in the relationship between you and your contractor. Hence, this is why you’ll often hear IR35 referred to as the “Intermediaries Legislation”.

Direct vs indirect

If you engage contractors direct, you’ll often be purchasing services from a “personal service company” (in other words, the contractor’s limited company). Most contractors operate through personal service companies when providing services. This is to minimise the amount of tax they have to pay when outside IR35.

If you hire contractors through recruitment agencies, the agency is the intermediary. If you hire a limited company contractor through an agency, both the contractor’s limited company and the agency are intermediaries.

End clients and fee payers

There are two types of parties other than the contractor in the contractual chain – the end client and the fee payer.

When you hire direct, you are both the end client and the feepayer. If you hire through an agency, it’s your responsibility to determine if the working arrangement you have with your contractor is inside or outside IR35. End clients like your company must send the status determination statement to the fee payer and everyone else in the supply chain.

If the contractor is within IR35, it’s the fee payer’s responsibility to collect and transfer tax related to employment income (specifically income tax, both forms of National Insurance contributions and (if applicable) Apprentice levy on services provided).

What is IR35 checking for?

IR35 is a check for “disguised employment status”.  HMRC wants to know that, if you removed all the intermediaries from a chain, would the relationship between a contractor and the end client business be more like an employee-employer relationship than a genuine business arrangement?

HMRC is convinced that there is a tax avoidance conspiracy involving tens of thousands of high-paid contractors working in cahoots with employers. IR35 was an attempt to stop this but it didn’t work as well as they’d hoped. So, they took a new approach and switched responsibility for determining IR35 status and the associated financial risk to employers to make the purchaser of services liable rather than the seller.

Should I use the HMRC’s Check Employment Status for Tax tool?

HMRC’s CEST tool is a multiple-choice question designed to help employers understand the IR35 status of their contractors.

While CEST is useful in a limited sense for getting a basic idea on employment status, the coding behind has been buggy since 2019. It also doesn’t properly measure a key IR35 determinant called “mutuality of obligation”. And, in around one in five tests, the tool is unable to determine IR35 status at all.

By all means, use it but don’t base a defence on it.

The IR35 service for employers

We create legally-watertight IR35 contracts and help your company stay compliant through your engagement. In the rare event we do make a mistake, our insurer will cover all costs.

For more information on IR35 determination for employers, please call CoComply on +44 (0) 203 051 9792, email [email protected] or fill out the form below.