The IR35: Employee, Worker or Self-Employed?
What is the IR35?
IR35 is the name given to tax legislation that identifies individuals who are not paying the tax they should be. The IR35 legislation challenges people who supply their services to clients through a personal service company, or a limited liability partnership, who the HMRC believe are actually ‘disguised employees’ from a tax perspective and should be taxed in the same way as an employee.
From 6 April 2017, it became the role of public sector organisations to determine the IR35 status of engagements rather than its contractor. If the public sector organisation deems the engagement to be inside IR35, it has to deduct tax and national insurance contributions from contractors’ pay at source, rather than allowing them to defer and claim expenses. It has been suggested that those working regularly in the public sector could lose 30% of their take-home pay.
Many public sector bodies have been taking a blanket approach and incorrectly deeming many engagements to be inside IR35 so the Association of Independent Professionals and the Self Employed (IPSE), has advised all contractors to check their IR35 status in order to resolve the confusion and uncertainty over the newly implemented public sector rule changes.
HMRC’s new online Employment Status Service (ESS) tool is designed to provide clarity around IR35 status and assist public sector clients and agencies in making IR35 determinations.
Chris Bryce, IPSE chief executive said, “We urge all contractors in the public sector to complete the test and take the results to their client. This is the only way contractors can get fairness and clarity. HMRC has said it will stand by the results of their ESS tool and IPSE intends to hold them to this.”
Factors to determine those that are Self-Employed, an Employee or Worker
Whilst someone can be self-employed from a tax point of view but be a worker or an employee from an employment law perspective, the following are useful reminders from gov.uk of what both HMRC and employment tribunals consider.
Someone is probably self-employed, if most of the following are true:
- they’re in business for themselves, are responsible for the success or failure of their business and can make a loss or a profit
- they can decide what work they do and when, where or how to do it
- they can hire someone else to do the work
- they’re responsible for fixing any unsatisfactory work in their own time
- their employer agrees a fixed price for their work – it doesn’t depend on how long the job takes to finish
- they use their own money to buy business assets, cover running costs, and provide tools and equipment for their work
- they can work for more than one client
- they put in bids or give quotes to get work
- they’re not under direct supervision when working
- they submit invoices for the work they’ve done
- they’re responsible for paying their own National Insurance and tax
- they don’t get holiday or sick pay when they’re not working
- they operate under a contract (sometimes known as a ‘contract for services’ or ‘consultancy agreement’) that uses terms like ‘self-employed’, ‘consultant’ or an ‘independent contractor’
Someone is probably an employee if most of the following are true:
- they’re required to work regularly unless they’re on leave, for example holiday, sick leave or maternity leave
- they’re required to do a minimum number of hours and expect to be paid for time worked
- a manager or supervisor is responsible for their workload, saying when a piece of work should be finished and how it should be done
- they can’t send someone else to do their work
- the business deducts tax and National Insurance contributions from their wages
- they get paid holiday
- they’re entitled to contractual or SSP, and maternity or paternity pay
- they can join the business’s pension scheme
- the business’s disciplinary and grievance procedures apply to them
- they work at the business’s premises or at an address specified by the business
- their contract sets out redundancy procedures
- the business provides the materials, tools and equipment for their work
- they only work for the business or if they do have another job, it’s completely different from their work for the business
- their contract, statement of terms and conditions or offer letter (which can be described as an ’employment contract’) uses terms like ‘employer’ and ‘employee’
Someone is probably a ‘worker’ if:
- they have a contract or other arrangement to do work or services personally for a reward (your contract doesn’t have to be written)
- their reward is for money or a benefit in kind, for example the promise of a contract or future work
- they only have a limited right to send someone else to do the work (subcontract)
- they have to turn up for work even if they don’t want to
- their employer has to have work for them to do as long as the contract or arrangement lasts
- they aren’t doing the work as part of their own limited company in an arrangement where the ‘employer’ is actually a customer or client
Read more on the difference between an Employee and Contractor here.