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IR35 Contracts – the key legal issues to look out for

In determining whether a person’s contract work will fall under the governance of IR35, a number of key factors are identified to establish the true employment status of the worker, including issues such as the right to substitution, control, mutuality of obligation and other factors which may or may not indicate ‘self-employed’ rather than ‘employed’ status.  If you are a contract worker, it’s important to remember that your working practices, as well as your contract wording, will be taken into account by the HMRC during any investigation.  It is therefore very important that your normal way of working closely matches the way you represent this in your contract. 

The key IR35 factors in determining employment status

So what are the key factors used by HMRC when determining if an assignment would be deemed to be IR35 caught or not?  IR35 experts have identified the first three factors as the most important: Control and Direction, Substitution and Mutuality of Obligations.

Control & Direction

One of the most important elements of IR35 status revolves around the extent to which a client controls where, when and how an individual performs his work and it is important that a contractor can demonstrate a large degree of autonomy in the way they undertake a project.  This distinguishes the contractors’ role from an ‘employee’ situation as employees are usually under direct supervision.

To demonstrate that they are not under the direct supervision and control of the client, a contractor must show that the client has no influence over how the contractor performs his services, nor the manner in which they are performed.

Red flags in a contract which would infer a classic ‘employment’ scenario include:

  • Reference to a line manager, or some other direct reporting structure;
  • Including work start and end times or even preferred break times; and
  • Contractors should not be entitled to the usual benefits so there should be no holiday entitlement or sick pay.


This point often causes concern during contract negotiations as companies wish to engage a particular individual for a project and do not like the idea of someone else turning up to deliver the services required, but the right to provide a substitute has long been deemed to be an important factor when demonstrating that a contract assignment fall outside the scope of IR35.

An employee provides his/her personal services to an employer (client), whereas a business would provide its services to a client, rather than the exclusive services of an individual.  As a result, all professionally drawn-up ‘IR35 friendly’ contracts will include a substitution clause.

The right of substitution – important points

  • The right to provide a substitute must be a genuine one, otherwise HMRC may conclude that the clause is a ‘sham’. A contractor should be able to show how a substitute could be used in practice, however many experts say that simply having the right to provide a substitute is a strong indication that the contract falls outside IR35, even if the right is never exercised;
  • The contractor company should always pay for any costs relating to the provision of a substitute, together with any training necessary, and all arrangements for bringing the substitute on site must be made by the contractor.
  • If a contract does not have a right of substitution in place (i.e. your contract is one that requires personal service), this does not automatically mean that it will be caught by IR35, as many other factors are also taken into account, but it would certainly prudent to speak to an IR35 advisor to ensure all of the other important issues are clearly covered.

Mutuality of Obligation

A mutuality of obligation exists when an employer expects a worker to undertake work when asked to do so, and the worker expects to be given work on a consistent basis. For self-employed people, they would expect a client to hire them to undertake a specific task, with no expectation of further work being provided after the initial task expires.

For a contract of service to exist at all, there must be an ‘irreducible minimum of mutual obligation’ – which means that the engager is obliged to remunerate the worker, and the worker is obliged to provide his/her skills. As this irreducible minimum could exist in both a contract for services AND a contract of personal service, this is not sufficient to determine the true nature of a contract.

The important thing to remember here is that mutuality of obligation question arises not during the course of the initial contract, but what happens when this contract expires.

It is possible that, by having an IT contract renewed many times, then this could be a pointer towards ‘employment’. The HMRC have previously argued that “where work is regularly offered and accepted over a period of time a continuous contract of employment may be created.”

Provision of Equipment

The contractor should normally use their own equipment rather than that supplied by the client.

Financial Risk

How much financial risk does the individual undertake in their work? If all the risk lies with the client, then this is an indicator of ‘employment’ rather than ‘self-employment’.

Basis of Payment

The regularity of payment may have some influence on IR35 status. Self-employed people are often paid by the job, rather than a fixed hourly/daily rate.

Part & Parcel

To what extent has the individual become integrated into the organisation?, i.e. do they have access to staff facilities, attend staff meetings, attend staff social events or receive staff benefits?

Exclusive Service

Does the individual work for just one client, and have their contracts been renewed many times? The self-employed typically work for a number of clients at once.

In Business On Your Own Account

Here are some typical features of a ‘real business’ for IR35 purposes:

  • Do you have your own business website, and company email address?
  • Do you have company stationery, letterheads, a logo, and customised invoices?
  • Is your company registered for Value Added Tax (VAT)?
  • Has your company ever employed anyone else, or used sub-contractors?
  • Do you have business liability and professional indemnity insurance in place?
  • Has your company invested in training, or improving its marketability in any other way?
  • Does your contracting business ever advertise its services, either on its own website, or on freelancer-type portals?
  • Do you have dedicated office space in which you have carried out any contract-related work?
  • Is your company registered under the Data Protection Act (for dealing with client’s data)?

These pointers are the typical characteristics of a working business, and may help show that a contractors’ business is indeed in business on its own account, rather than working in a similar fashion to an ‘employee’.

Further Information

We would strongly recommend you consult an IR35 contract review specialist such as Atypical Law  to examine each new contract you take on, and consider taking out IR35 insurance in case you are selected for investigation by HMRC.

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