Aside from the main factors (Right of Control, Substitution and Mutuality of Obligation) there are a number of other contract factors that should be addressed before an agreement is signed.
When assessing a contract the HM Revenue and Customs (and any subsequent court) would look at the indicators that point towards self employment and those that point towards employment. They would then stand back and look at the situation as a whole.
It is therefore important to satisfy as many of the self employment tests as possible if you hope to be considered outside IR35, including;
- Financial Risk
- The Opportunity to Profit
- Provision of Equipment
- Part of the Organisation
- Right to Employee Benefits
- Contract Term
- 2003 Conduct Regulations
If you are weighing up whether or not you are Inside IR35 or Outside IR35 and you would like to speak to a professional advisor contact Commonwealth Contractors now!
To discuss your situation call now on 0330 390 9021 or Submit your Details and we will get right back to you!
An employed person will not normally have any financial risk when undertaking an assignment.
A self employed person however may put themselves at financial risk if:
- A fixed price is quoted for a job and the job overruns
- Unsatisfactory work is rectified at no additional cost
- Materials are purchased or overheads paid in order to undertake an assignment
- Skills training costs are covered for a particular engagement
The risk of making a financial loss is a strong pointer towards self employment.
Opportunity to Profit
A self employed contractor will have the opportunity to profit.
For example, if a fixed price is arranged for a particular project and it is suitably completed 2 weeks early the contractor will profit from early completion as they can take on other assignments in that time.
Also, a self employed contractor may profit where they are able to reduce overheads by sourcing cheaper materials or equipment.
An employed person would not be able to profit in this way as they would be paid a fixed salary.
Provision of Equipment
An employed person would generally have all equipment required to undertake a job provided for them by the employer. This would normally include computers, stationary, training manuals etc
A self employed contractor would be expected to provide all of the equipment required to undertake a specific contract. If the contract implied that the equipment was provided by the client the HM Revenue and Customs would argue that the contractor was employed rather than self employed.
Part and Parcel of the Organisation
Being part and parcel of the organisation (client) is normally assessed by looking at day to day working arrangements rather than the contract. However if a contract does include any information that would imply that you will become a part of the organisation, it should be removed immediately.
When you work as a contractor it is important to distance yourself from the client and ensure that you are not considered or seen as an employee.
For example you should not:
- Have client business cards, you should have your own
- Be listed in the clients internal telephone directory
- Be entitled to use the staff canteen or be invited to the Christmas party
- Be part of the management team
- Appear on organisational structure diagrams
Often contractors are not seen as part of an organisation immediately but are instead slowly integrated into it.
It is strongly recommended that any assignments are limited to a maximum term of 24 months. Not only will this reduce the likelihood of integration but it also means that you do not lose your ability to claim site based expenses (see Site Based Rules).
Right to Employee Benefits
If the contract entitles you to holiday pay, sick pay or any other form of employee benefit you will find it very difficult to defend yourself in the event of an IR35 Investigation.
If you intend to take profit payments from a limited company do not accept a contract with any of these clauses. One of the reasons you receive a higher rate in the first place is so that the client does not have to provide employee benefits and can terminate employment at any time.
Benefits may include:
- Holiday Pay
- Sick Pay
- Maternity Pay
- Pension Scheme entitlement
- Staff car parking
- Staff gym membership
An employed person would either give or receive a notice of termination. The employee would then be required to work the notice period as specified in the employment contract before leaving the company.
As a self employed contractor once the work has been completed and signed off by the client you must be able to walk away from the client without any restriction. If the client has the ability to retain your services until a notice period has been worked then this is a very strong pointer towards employment.
Notice periods given during an assignment by either party may still be considered a pointer towards employment but only a minor one at best.
The contract term on its own is not a pointer towards self employment. However, taking shorter assignments of 6-12 months may support an argument towards self employment as employed people normally stay with an employer for a long period of time (1-2 years plus).
An employed person will normally receive a fixed salary and a regular monthly payment.
Self employed contractors generally submit invoices on completion of deliverables at irregular intervals.
If you receive the same amount each month on the same day you could give the impression of employment rather than self employment.
2003 Employment Agencies and Employment Businesses Conduct regulations
Opting out of the ‘Conduct Regulations’ is another way of showing that you set out to be a professional supplier rather than someone hoping to benefit from quasi-employee protections from the Conduct Regulations
Find out More
To find out more about Commonwealth Contractors call now on 0330 390 9021 or Submit your Details and we will get right back to you!