How to determine a worker’s status under IR35
IR35 is a set of tax rules in the UK that affect contractors, freelancers, and self-employed individuals who provide services to clients through an intermediary, such as a limited company or a personal service company. The rules are designed to prevent workers from avoiding tax and national insurance contributions by setting up these intermediaries. If a worker is found to be “inside” IR35, they are considered to be an employee for tax purposes and must pay tax and national insurance contributions accordingly.
Determining a worker’s status under IR35 can be a complex process, and it’s important to get it right to avoid costly penalties and legal disputes. Here are some key factors to consider when determining a worker’s status under IR35:
One of the main factors to consider is the degree of control the worker has over their work. If the client has significant control over when, where, and how the work is carried out, this suggests that the worker is more like an employee than a self-employed contractor.
Another key factor is whether the worker is required to provide their services personally, or if they can send a substitute in their place. If the client insists that the worker must provide their services personally, this suggests that they are more like an employee than a self-employed contractor.
Mutuality of obligation
This refers to the obligation of both parties to provide and accept work. If the client is obliged to offer work to the worker, and the worker is obliged to accept it, this suggests that they are more like an employee than a self-employed contractor.
Self-employed contractors are typically responsible for their own financial risks, such as the cost of equipment and materials, and the risk of not being paid. If the worker has no financial risk, or if the client is responsible for covering their costs, this suggests that they are more like an employee than a self-employed contractor.
If the worker is integrated into the client’s business, for example by having a company email address or being included in the client’s organizational chart, this suggests that they are more like an employee than a self-employed contractor.
Intentions of the parties
Finally, it’s important to consider the intentions of both parties. If both the worker and the client intended for the worker to be a self-employed contractor, and the working arrangements reflect this, this can be a strong indicator that the worker is outside of IR35.
Once these factors have been considered, it’s important to make a determination of the worker’s status under IR35. This can be done using HMRC’s online tool, CEST (Check Employment Status for Tax), or by seeking professional advice from a tax specialist or employment lawyer.
If a worker is found to be inside IR35, they will need to pay income tax and national insurance contributions on their earnings, as if they were an employee. The client may also be required to pay the employer’s national insurance contributions and may need to provide employee benefits such as sick pay and holiday pay.
In conclusion, determining a worker’s status under IR35 requires a careful analysis of a range of factors, and it’s important to get it right to avoid costly penalties and legal disputes. By considering the degree of control, the right of substitution, the mutuality of obligation, financial risk, integration, and the intentions of both parties, businesses can make an accurate determination of a worker’s status under IR35. It’s also important to seek professional advice if there is any uncertainty or if the working arrangements are particularly complex.