Are you Safe from the IR35 Regulations?
As a provider of services through your own limited company you will no doubt already be aware of the IR35 regulations. The purpose of this letter is to draw your attention to decisions of The Courts over recent years which have clarified when these regulations may or may not apply.
In principle, the IR35 regulations need to examine if an individual provides services (either intellectual or manual) via their own private company to third parties (possibly but not necessarily via an agency). The IR35 regulations, which basically prevent companies from distributing profits tax-efficiently via dividends, apply where the relationship between the individual director/shareholder and the ultimate recipient of that director/shareholder’s services would be an employment relationship if the intermediary company and (if appropriate) agency were ignored.
The case involving Dragonfly Consulting Limited ultimately decided in favor of HMRC in The High Court was, as with all IR35 cases, were concern about establishing whether the employment relationship exists in that particular case. The decision indicates that the following issues are likely to be helpful in ascertaining the position but are not decisive:-
- The intention of the parties.
- Provision of small items of equipment by the contractor.
- Attendance of the contractor at social functions.
- Training arrangements for the contractor.
- Sick pay and holiday arrangements.
- Payment by the contractor of minor expenses.
The more important issues were as follows:-
How to Control IR35 Regulations
This is not in connection with the way in which the contractor undertakes his/her duties which are often professional operations not readily susceptible to detailed control. What needs to be considered, according to the Dragonfly decision, is whether the ultimate end-user of the contractor’s services can determine in general terms the work to be complete, the project to be work upon, and the order in which work is to finish. If such control can be practice then there is likely to be an employment relationship existing and the IR35 regulations would consequently apply.
The key question is whether the contractor has to provide his/her services personally or whether he/she can send a substitute of his/her choosing to undertake the services in question. If the ability to send a substitute is genuinely the case and indeed ideally if a substitute has been used then it is almost impossible for an employment relationship to exist and consequently very difficult for HM Revenue to impose the IR35 regulations.
- If there is a general expectation that ignoring holidays, non-work days and sickness, etc the contractor will turn up to provide his/her services and;
- The contractor having turned up will be paid whether or not any actual work is available or indeed in the short term whether the contractor undertakes any work then there is likely to be an employment relationship and the IR 35 regulations will apply.
Of lesser importance but worthy of consideration is recent HM Revenue and Customs guidance which indicates that for any relationship regard as one of self-employment, it will be looking forward to that a “yes” answer will be specified to most of the following questions (i.e. presumably three out of four):
- Risk your own money?
- Provide the main items of equipment (not the tools that many employees provide themselves) needed to do the job?
- Regularly work for a number of different people and require a business set up to do so?
- Have to correct unsatisfactory work in your own time and at your own expense?
Other relevant factors which should be considered in conjunction with the key factors of control, substitution, and obligations plus the HM Revenue guidance as detailed above are often as follows:-
- Payment arrangements, i.e. by the project (indicating self-employment) or hourly rate (indicating employment).
- Ability to increase profitability as a result of the contractor’s efforts which, if present, would indicate self-employment.
- The option to hire someone else to undertake the work. The ability to engage others to assist at the contractors’ own expense which, if present, would indicate self-employment.
- Where services are available, when services are available, and how services are available; are in the hands of the contractor (indicating self-employment) or the engager (indicating employment).
- Contracts with more than one organization at the same time or just one contract at any one time.
- A contractor providing his/her services broadly by reference to standard hours (indicating employment)or at times to suit the contractor (indicating self-employment).
Where the contractor receives his pay on an hourly basis, providing his/her services to only one organization at a time by reference to standard working hours with little or no opportunity to influence the financial return generated (other than by working longer hours), the IR 35 regulations are likely to apply. This will particularly be the case where the contractor realistically holds no entitlement to send a substitute, is subject to overriding control by the end-user, and expects to provide his/her services week in/week out and be more or less surety of payment at an hourly rate for hours put into labor.
Each case must be considered on its own merits. Bearing in mind all the relevant circumstances and some cases will certainly be very borderline. Each case must also be considered in the context of the actual circumstances rather than the theoretical terms which may hold the record in any written contracts. HM Revenue at www.hmrc.gov.uk/calcs/esi.htm allows, on a no-names basis, relevant factors to be disclosed and a determination of status obtained which can be a useful exercise in many cases.
If you believe you may be at risk of the IR35 regulations; applying in the light of the criteria outlined in this letter or via the HM Revenue website status indicator. Please let us know as soon as possible.