The rules applied by HMRC when determining whether a contract falls within the terms of the IR35, establish whether you are an individual Contractor or a company employee. In effect, it is the Governments way of deciding your exact employment status and thus the amount of tax you are liable to pay. It is essential that you get this right in order to benefit from IR35, in particular those afforded by becoming an Employed Contractor under an Umbrella Company.
Each Contractor is liable for deciding whether they comply with the rules appertaining to IR35 compliance and this is applicable to each individual contract undertaken by the Contractor.
In order to ascertain whether a Contractor falls within the rules of IR35, HMRC will apply a Business Entity Test to each individual contract, which comprises of 12 main questions. The IR35 Business Entity Test was published by HMRC in May 2012 following the work of the IR35 Forum and the Office of Tax Simplification. Points are allocated in answer to 12 “yes or no” questions and the total number of points obtained, determine the level of risk from which a contractor can ascertain their compliance with IR35. The full list of questions and rules governing IR35 may be found here on the HMRC website but the level of risk is summarised as follows: –
- Less than 10 points:High Risk
- 10 – 20 points:Medium Risk
- More than 20 points: Low Risk
In general when determining if a person qualifies as a Contractor as opposed to a standard company employee, broadly speaking HMRC is seeking to ascertain that the following elements are amongst those that should be incorporated in an individual contract to comply with IR35.
Supervision and Control
When undertaking any contract, either as a director of your own company or otherwise, you must show that the end-client has no control over the way in which your services are provided by you. It is essential that you can clearly state that the end client has no on June influence on your operations.
Mutual Understanding of Obligations
In essence, the contract must not oblige the end client to offer ongoing contract work and similarly, the contractor must not be obliged to accept any work from the end client. The interpretation of this element is often seen as a grey area for contractors and so special attention should be paid to the terms and conditions of the contract regarding any/all future work.
Rights of Substitution
In order to be assessed as a genuine independent Contractor rather than a direct employee, each individual contract must state that you have the unequivocal right to provide a substitute, always assuming that the said person has the appropriate qualifications, skills and experience.
These points provide a general overview that will help to enable Contractors to ensure that they comply with the conditions under IR35, but they are not all encompassing!
It is our job and indeed apply our expertise to ensure that any Contractor Solution we recommend will fully comply with the tedious range of terms and conditions that HMRC applies to the rules governing IR35. Furthermore such rules may be changed at any time and by using our services, we are able to maintain your compliance with any such changes as and when they may occur.
Find out What is IR35?