When looking at IR35 status, assessors tend to begin by focusing on the three major status tests. These are substitution, control and mutuality of obligation. You can find out more about these here. However, it's also important to consider the other minor status tests that assessors look at when when evaluating IR35 status.
If you get the small things right - i.e. the multitude of minor status tests - you're more likely to have a strong IR35 position and be able to defend yourself should you fall foul of an HMRC tax investigation.
For example, if you were to comply with the minor status test of financial risk by providing your own equipment for your work, i.e. your own laptop and any software necessary to do your job, then this would be positive for your IR35 status. Positive in the sense that you have more of a leg to stand on, by operating as a genuinely self-employed person should, just in case HMRC investigate you.
However, if you were to not provide your own equipment and you used your end client’s equipment instead, this would negatively impact your IR35 status and would show that you’re acting in a way that an employee would. HMRC could use this in their investigation as a reason to argue that you are not genuinely self-employed, leaving you in a spot of bother.
Here's a quick look at more of these minor status tests:
Is there a possibility that you could lose income - i.e. might not get paid, or might have to fix a mistake for 'free' - when providing your services? If so, then you are subject to something called financial risk, which essentially means that your income isn't guaranteed. This is good for your IR35 status, meaning if you can show you have financial risk, you're more likely to be outside the rules. Financial risk can be demonstrated in many ways, but the following three are the most common.
1. If you were to make a mistake in providing your services, you should be expected to fix that mistake at no extra charge to your end client.
2. You should supply any equipment needed to complete the services through your own limited company and not accept any equipment from your end client. The only exception to this rule is when the equipment is necessary due to security provisions of your end client. An example of this is if you are an IT contractor you are expected to provide your own laptop. An exemption to this would be if your end client had high standards for data protection and required you to use one of their laptops as a result.
3. You shouldn't be claiming expenses from your end client. This could be seen as a benefit of employment. Any expenses should be incurred by your limited company.
Put simply, you should have the right to terminate any contract before the contractual end date. It would be better to be able to terminate the contract immediately, however, a notice period of up to 4 weeks is considered acceptable for IR35. Being able to terminate a contract shows a lack of mutuality of obligation, which is a key status indicator.
Your client should also have the right to terminate a contract early. If your end client has the right to terminate the contract early or has an up to 4-week notice period, like you, then this shows that you are undertaking financial risk and stand to lose money, a positive for your IR35 status.
Any projects you undertake should have a clear and set end date. If a contract appears to reflect an ongoing role then this could negatively impact your IR35 status. Contracts can, however, be extended if agreed and signed by both parties. Such extensions should also have a clear end date.
You should be able to work with other clients. It's actually a great way to show that you're a genuine contractor if you're providing your services to more than one end client and subsequently have multiple streams of income. This is something that you should make sure is outlined in any contract you sign so both you and your client know where you stand.
Part of proving you are a genuine self-employed contractor includes ensuring you are not integrated into your client's company. You shouldn't be seen as ‘part and parcel’ of your end client’s company. If you have access to employee-only areas or a designated desk, then alarm bells should be ringing.
Do you receive any benefits from your end client that employees tend to receive? If so, this could be cause for concern. Employment benefits include things such as holiday/sick pay or access to a pension.
Statement of intention
A statement of intention should be found within your written terms. It outlines the original intention of the agreement between both parties. It can appear in various forms. This is the one we see most often:
“This contract is a Contract for Services. Nothing in this contract shall create an employee/employer relationship between the Service provider and the Client.”
Business on own account
The final minor status test we need to cover is proving your limited company is a business in its own account. This is as simple as proving that you are genuinely self-employed. The easiest way of proving this is by investing in a website and branding for your limited company.
You don’t need every one of these minor status tests written into your contract to be safe from HMRC, but the more you squeeze in there, the stronger your IR35 status will be. You should also know that not all of these status tests hold the same weight as each other. IR35 is assessed on a case-by-case basis and is a very complicated matter. It's impossible to give an accurate indication of status from any one of these minor status tests alone.
This is something that an independent contract review can help you with. A contract or working practice review completed by an IR35 specialist is a good way to assess and actively improve your status. This way you have direct access to the specialist who undertook your review and you can ask questions and even discuss potential amendments.
About the Author
Alice Hickling is a Junior Digital Copywriter at Larsen Howie. Larsen Howie is a provider of specialist insurances and services, including Professional Indemnity cover and IR35 advice, to contractors, freelancers and consultants. The business also leads the way with their specialized IR35 services, with a dedicated in-house team of experts that boast vast, first-hand experience in dealing with all manner of IR35 queries.