IR35: The Three Main Principles To Decide Your SDS

Determining whether IR35 applies to your contract is a complex matter. There are three key principles that will determine your IR35 status:

  • Supervision, Direction, and Control: What degree of supervision, direction and control does your client have over what, how, when and where you complete your contract and day to day work?
  • Substitution: Are you required to carry out the work yourself, or you can you send someone in your place?
  • Mutuality of obligation: Is your client obliged to offer you work, and are you obliged to accept it?

Supervision, Direction, and Control (of the worker)

Supervision, Direction, and Control are tests of ‘employment’ that could put a contract inside IR35.

‘Supervision’ means the extent to which your client oversees your work and how you perform it to a standard they have specified.

‘Direction’ means your client directing how you complete your assignment, by providing instructions, guidance, and advice as to how the work is to be done. Someone providing direction will often coordinate how the work is done as it progresses.

‘Control’ is where you have someone dictating the work you do and how you go about it. This also includes the power to move you from task to task as priorities change.

Substitution

Another test of ‘employment’ is whether your business can provide a substitute to do the work. You should be able to send a substitute to complete the work on your behalf or reassign the work. If you genuinely can provide a ‘substitute’ and on occasion actually do, then the contract is likely to be outside the scope of IR35.

If the client is only interested in your own suitability and skills and no substitute can be offered or accepted, then any substitution clause will likely fail under HMRC scrutiny. If you have to personally provide the services agreed with your client, this is usually a good indicator that you’re an employee and are not self-employed.

Mutuality of Obligation

To qualify as a contractor, there must not be a ‘mutuality of obligation’. There are two obligations to consider:

  • An obligation for one party to offer work
  • If work is offered, an obligation for the other party to accept it.

Put simply, a contractor must work from project-to-project, with no obligation to carry on working for the client after the work is complete. A contractor also has the right to terminate a contract part-way through. An employee, on the other hand, can only work for one company and has an obligation to carry on working when their tasks are complete.

Other Factors That Affect The IR35 Status Of A Contract

Along with the three key areas highlighted above, you need to be aware of the following:

  • Alternative work: If you’re contractually obliged to have one client at a time, you’re probably an employee, not a contractor
  • Equipment: Unless there’s a sound reason (such as for safety, security or practicality), you should be using your own equipment, rather than equipment supplied by your client
  • Financial risks: Regular, guaranteed weekly or monthly work specified in a contract looks more like an employee ‘contract of services’ rather than professional fees paid to a person who is self-employed. Any errors made during the contract must be rectified in the contractor’s own time, and the contract should say this. A requirement to maintain professional indemnity insurance is normal.
  • Employee Type Benefits: This includes holiday, sick pay, pension – the contract should state these do not apply.
  • Part and parcel: If a contractor becomes so integrated into the client’s organisation that they, for example, appear in organisation charts, or have staff reporting to them, then they’re behaving exactly like an employee and the contract could fail an IR35 test. The freelancer or contractor should distance themselves from the client’s corporate structure.
  • Termination: The contract should state that it will be terminated at the end of the project or if there is a breach of contract.
  • Misc: Other things you should take into account are being able to demonstrate that you are “in business on your own account” – you may not have stock, premises, or staff but you will probably have an office (even at home), a website, be VAT registered, have business stationery, advertising, invoices, insurance and have other clients and an accountant.