UK tax law, IR35

Personal Services Legislation in UK

In testing for IR35 compliance, consider these points...

  • Each Contractor according to whether he/she would have been an employee were they engaged directly by the client. The Inland Revenue have an advice line but will only give their interpretation based on a signed contract, so if your contract does not comply it will be too late!
  • The terms and conditions of the relevant contract which will usually reflect what would have applied had the worker been engaged directly by the client. Read through the contracts offered to you after April 6, 2000 and get advice before you sign or commit to anything. We recommend that you become conversant with all these criteria and compare the wording of the contract to see if it complies with legislation.
  • Whether the contractor has other clients and a business organisation. The Inland Revenue are looking at the number and variety of clients worked for during each year together with other factors e.g. staff, office premises and methods of acquiring new contracts with clients.
  • Whether the client has a right to exercise "control" over the Contractor. A true consultant is hired in to a business with a guideline or brief and would then control his/her own methods, reporting to the management team that hired him/her.
  • Whether the client can determine what work is carried out. Again, a true consultant with a guideline would produce a report based on his/her findings, having used whatever methods he/she thought relevant - it is, after all, what they were hired for.
  • Whether the Contractor has a right to supply a substitute for that particular contract or assignment. If the job requires to be done then companies would be invited to tender for it, and on acceptance, any person from that company could be despatched to the client's premises to carry out that job. It is possible for there to be a number of personnel with the necessary skills capable of carrying out that job for the client.
  • Whether the Contractor is able to work exclusively at home using his/her own computer equipment or whether he/she is provided with office space at the client's premises. If the entire contract must be performed at the client's premises using their computer equipment and support, then this would be seen to be a weakening factor.
  • Whether the Contractor risks his/her own money e.g. by buying asset[s] needed for a job and bearing the running costs, paying for overheads and/or materials. The purchase of asset[s], e.g. laptop computer, which may or may not get used for any one contract shows a degree of risk and strengthens the case, but alone does not guarantee compliance with legislation.
  • Whether the Contractor tenders or quotes a fixed price for a contract and whether there is a consequent risk of bearing the additional costs if the job overruns, e.g. requiring additional personnel or hours to complete by a dead- line. In normal commercial circumstances, companies would be invited to tender for a contract and the one with the best value or price would be engaged. The contracted price would be fixed and any unforeseen problems that occurred would cause the Contractor to be less profitable on that contract. Only negotiated for incidents may permit extra payments by the client.
  • The frequency of payment and whether additional payments such as overtime, long service bonus or profit share are available. Independent contractors tend to be paid a fixed sum for a particular contract although it is possible to have stage payments. Where a contract is of a fixed price, it suggests a performance by the Contractor which would not usually revolve around a guaranteed number of hours at a predetermined rate of pay.
  • Whether the Contractor becomes "part & parcel" of a client's organisation. If, having accepted a contract, the Contractor occupies at the client's premises, office space, uses equipment and all the support functions as an employee does, it will weaken his/her case.
  • Whether a right to terminate an engagement exists, by giving notice of a specified length or is it done on completion of the contract or if the terms of the contract are breached. Standard practice with commercial contracts is for a performance of that contract to be evaluated on its completion and for the client to decide whether that contract has been performed according to the terms and conditions or whether there has in fact been a breach of them. This would then affect payment in full or whether there is some deduction, retention, or remedial work.
  • Whether there is an entitlement to sick or maternity pay, holiday pay, pension contributions etc. A true independent consultant would not be entitled to any of these.
  • The length of periods worked for any one client, whether by a series of short but consecutive contracts, or an initial short contract subsequently extended for a longer period. Don't think that a short contract followed by another separate one at the same client will help!
  • The intention of the relationship between the client and the Contractor, to be one of a self-employed status rather than an employee. This will be implied or expressed within the terms and conditions of the contract.

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