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When HMRC look at an engagement to test its status, they will be looking for two things: contract wording which shows the engagement to be between two independent parties and working practices that demonstrate this independence.  It is true that where neither the terms of the engagement, nor the working practices give a clear indicator of status, HMRC will look to other factors such as the financial risk being taken by the contractor and how their business is run (e.g. expenditure associated with running a business), but the overwhelming majority of cases are determined by the working practices and the contract terms.

Let us consider both ends of the spectrum:

IR35 Rules Explained – Hell

Sadly, more often than one would like, it quickly becomes apparent by virtue of the contract wording and/or the working practices that the engagement would be classed as a contract of service (employment). 

We have seen practices which indicate that the client is supervising and controlling the contractor’s hours and location; work is being handed out on a task-by-task basis with little or no input by the contractor; it is evident that the client is only interested in the services of the individual and will look to the agency to find a replacement if the individual fails to deliver; the payment is by the hour with overtime available; there is a long notice period which is an indicator of employment etc.

Clearly, no amount of re-writing of the contractual terms will assist a contractor if these are the circumstances and the contractor should be considering paying themselves under the deemed salary calculation.

IR35 Rules Explained – Heaven

In an ideal engagement, the End Client would be asking your company to take their business ‘on a journey from A to B’.  Deferring to your knowledge and expertise, the Client would be looking to you to map out direction to be taken, identify the key milestones to be achieved en route, the project deliverables and what ultimately constitutes a successful project sign off.  You would not only decide how the project was to be delivered, but if there were a number of locations where the work could be done (including your own offices), you would decide where and when.  Furthermore, your company would be undertaking the assignment for a fixed fee and when the project was delivered on time (even if meant that in the final three weeks, you were working 18 hours a day and having to bring in outside support to do so) your company would find another engagement elsewhere.

IR35 Reality

Reality, of course, lies in between (although we hope much closer to IR35 Heaven!).  Apart from the obvious Health & Safety issues contained within an 18 hour day, there are other practical considerations.  Rarely does a client have no knowledge of the systems, processes or procedures to be delivered and anyone who has been involved in a project will know that what is envisaged at the start is rarely the finished product – projects change, overrun and get cancelled – rarely could a contractor work for a fixed fee.  On an even more practical level, nobody operates in a vacuum and so a contractor will have to engage with the client’s staff at the times that they are available, the project may depend on variables not within either the End client’s or the contractor’s control; there may be security issues which require the work to be completed on site and so the list of variables continues.

Therefore, what both HMRC and we on this side of the fence will be considering are the three key areas of any engagement: Control, Personal Service and Mutuality of Obligation.

Other IR23 Rules Explained in IR35 – Determining Status: Part 2. Other factors relating to financial risk and being in business on ones own account should also be considered, although they are secondary to the key issues in bold above.

Freestyle Accounting – Limited Company Contracting Made Easy!

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