HMRC will broadly consider 6 key areas when looking to determine the employment status of freelancers and contractors. If you are not comfortable that these factors are supporting self-employment, but want to continue engaging with your freelancers and contractors as self-employed and outside the IR35 / Off payroll reforms, then you should now consider whether you need to change:
- your contractual arrangements, and/or;
- your working practices.
To evidence decisions hirers and recruitment businesses must produce a status determination statement (SDS) for each role.
So what are the key factors to be considered when assessing employment status?
1. Personal Service – Substitution
One of the most important of the 6 factors when considering employment status is whether or not there is the provision of a personal service.
If the individual were unavailable to carry on the role, for example, because they were sick, would that worker have the right to get someone else to carry out some or all of the work that needed to be done? If they could substitute, then this is a strong indicator of that role being outside IR35. To evidence substitution, the following would need to be considered:
A) Has substitution actually occurred; any evidence of this should be kept to show that this does practically happen. This could also be useful evidence for other contractors in similar roles who have right of substitution clauses in their contracts.
B) Is a right of substitution clause included in the contract with the Personal Service Company (PSC)? Agency and hirer contracts with the PSC will need to be checked and potentially revised to reflect the reality.
C) Do you have your own written substitution policy? This could be very helpful as it can support cases where, even though a contractor has the right to substitute, there may be restrictions relating to that substitute holding acceptable qualifications or security clearances which may prevent the right substitute being found quickly.
2. Mutuality of Obligation
An independent freelancer or contractor should not expect to be moved from task to task outside any terms within the agreed schedule of works. Neither should workers believe they have to accept any work offered nor should a hirer expect their freelancers or contractors to have to accept any new role offered by them. If this expectation existed, this type of relationship would be indicative of employment.
3. Control, direction and supervision
Freelancers and contractors operating outside of IR35 should be able to demonstrate some autonomy in relation to the manner in which the work is carried out. You need to consider:
How the work is carried out
A) Schedules of work should specify what needs to be done rather than how it needs to be done. Whilst it is acceptable to impose reasonable guidelines and procedures, such as for health and safety reasons, hirers should be able to demonstrate that the contractor knows how to do the job without supervision.
B) Checking on the progress of a project or deliverable is not the same as supervision.
C) Training and appraisals are for employees rather than contractors. Use of language is important here; e.g. a project meeting shouldn’t be described as a worker appraisal.
D) The staff handbook is for employees only. If there are procedures that contractors need to follow they should be described as such.
E) The more expert a freelancer or contractor is the less likely they are to be under the control of hirers’ own staff. Don’t undermine their expertise with contractual rights of control or direction where in reality these can never practically be realistic.
F) Contracts should recognise that a person has been engaged for their expertise. Details of qualifications must be kept.
When and where the work can be carried out
A) If there is any flexibility as to when the services can be performed this should be recognised in the contract or any guidance issued to freelancers and contractors.
B) If a freelancer or contractor can be moved from site to site without any ability to determine the order in which they carry out their tasks then this evidences employment. Clauses supporting this should be avoided unless necessary.
C) Where you have a role that is based on targets or deliverables, this is far less consistent with employment than simply working on an hourly rate, and so supports self-employment status.
D) If the freelancer or contractor is allowed to perform elements of the role at home, for example, to write up notes, plans or reports, this can also help support the role being considered one of self-employment
4. Financial Risk
Taking responsibility for financial risk is a good indicator of self-employment. The following factors are helpful from an IR35 perspective and are often seen in contracts with PSCs:
A) Provision of own equipment.
B) Contractual indemnities – for example obligating the worker to correct any defective work in their own time and at their own cost.
C) Short or no notice period to terminate.
D) Requirement for insurance to be held by the PSC.
E) Payment terms longer than for a typical employee.
F) Financial upsides if early completion of the project and downside if completion is late or delayed.
5. In business on own account – integration
Contractors should be easily separately identifiable from employees, for example:
A) Using different ID badges.
B) No standard staff benefits.
C) Different email address formats.
D) Excluded from team meetings (although they should of course attend project meetings).
E) No appraisals (given or received).
F) Excluded from organisation chart (or as a minimum identified as external resources).
Providing services to more than one client is helpful to evidence self-employment.
Any contractual restrictions imposed on freelancers and contractors should be carefully considered. It is more acceptable to say that a PSC shouldn’t spend time on other projects if it will adversely impact the delivery of the services to you rather than issue a blanket ban on them working elsewhere.
There is a requirement for hirers and agencies to take “reasonable care” when assessing status determinations, so you will need to evidence that reasonable care has been taken.
Status determination tools
To evidence an acceptable approach has been taken there are many status determination tools available which are designed to help a hirer or recruitment business reach an IR35 status determination with reasonable care.
HMRC’s Check Employment Status for Tax (CEST) tool is one of them, however, although many hirers are using this, many contracting industry experts and professional tax and accounting bodies have pointed out inherent flaws in the CEST tool.
When making an IR35 status determination, clients should always ensure that its processes and documentation support the IR35 status decision it makes (particularly when the decision is “outside IR35”). That’s why it’s very important indeed to choose an IR35 status determination tool which provides you with the support services that give you everything you will need.
Crest Plus’s IR35 Plus service enables recruitment businesses and hirers to manage IR35 determination decision communications throughout the supply chain.
Our determination tool is quick and easy to use and importantly the workforce management tool quickly and efficiently manages the workflow communications throughout the supply chain and is backed by support from our internal team of IR35 experts.
Key benefits for your business from our easy-to-use IR35 tool:
- Inside Ir35 decisions – can be directed straight to your preferred Umbrella or PAYE options.
- Speed – fastest tool on the market, completed in minutes.
- Branded – takes hirers and workers on your own seamless branded journey.
- Cost-effective – fantastic commercial options for our customers. IR35 Plus delivers a tool that supports your business with more than just an assessment determination.
- Decisive – delivers definitive answers quickly with no need for manual review.
- Integrated – you can easily integrate our tool into your CRM, and also use it to manage your PSL.
- Automated workflow – reduces time chasing SDSs.
- Insurable – multiple flexible insurance options are available to you to cover the cost of defending tax investigations and tax losses.
Get in touch with our IR35 Plus experts now on [email protected] to help get you started.