How to Determine IR35 Status for Your Small Business

Figuring out your IR35 status can feel overwhelming. This is understandable, as it’s a complex area of tax law. However, understanding how to determine IR35 status is crucial for every contractor. It significantly impacts your take-home pay and how HMRC views your working relationship with clients.

This guide clarifies the process and offers practical advice on how to determine IR35 status. This will allow you to understand your employment status based on your work completed.

IR35, also known as off-payroll working rules, is a tax legislation designed to prevent individuals from avoiding taxes by working as contractors when they are essentially employees. It applies to contractors and freelancers operating through their own limited companies.

How to determine IR35 status: The key tests

Determining IR35 status depends on several key tests. These tests stem from case law and form the basis of HMRC’s evaluation. Understanding these key factors is important to establish employment.

Control

This test assesses who decides how the work is done. If the client dictates when, where, and how you complete tasks, it suggests ‘inside’ IR35.

Employees typically follow instructions, while genuine contractors operating through a limited company have more autonomy over their working practices reflect their self-employed tax status.

HMRC’s employment status manual on determining status offers additional guidance. Check your employment status to determine which working rules apply.

Substitution

Can you send someone else in your place? A genuine right of substitution, without unreasonable client refusal, strongly suggests ‘outside’ IR35 status.

This highlights the core difference between a contractor providing a service and an employee filling a role.

Many IT contracts include a right of substitution, which is an important clause for demonstrating self-employment status. However, clauses about supervision may indicate you are inside IR35.

Mutuality of Obligations (MOO)

MOO examines the ongoing nature of the work relationship. An expectation of continued work beyond the current contract, with an obligation for you to accept further projects and a notice period requirement from the client for termination, may point to employment (‘inside’ IR35).

This often arises when continuous employment and mutuality of obligation span multiple contracts between the same parties.

As stated in ESM0543, HMRC argues that “regularly offered and accepted work over time may create a continuous contract of employment”.

Other factors influencing IR35 status

While the control, substitution, and mutuality of obligations tests are crucial, other factors also influence IR35 status determination. These national insurance contributions will have an impact on how much you contribute as an individual.

Financial risk

Do you bear any financial risk? Covering error correction costs, investing in equipment, or having professional indemnity insurance suggests ‘outside’ IR35 status. This demonstrates an independent business mindset and your off-payroll working arrangements as a sole trader.

Working practices

How integrated are you into the client’s organisation? Receiving employee benefits or attending staff meetings suggests you’re ‘part and parcel’ of the organisation, indicating ‘inside’ IR35 status. Chapter 8 of the ESM provides more information and personal IR35 contract reviews provide examples based on real experiences.

Equipment

Using your own equipment (laptop, software) indicates independent operation and aligns with off-payroll working. This distinction can establish employment as operating a distinct business.

In Business on your own account?

Factors like multiple clients, a business website, training investments, VAT registration, and advertising indicate being genuinely in business. This suggests you’re not reliant on a single employer, a key trait of being outside IR35 and how sole traders should operate as small businesses.

Tools and resources for IR35 determination

Support is available to guide you through IR35. You don’t have to navigate this complex process alone.

HMRC’s CEST tool

HMRC offers the Check Employment Status for Tax (CEST) tool. While helpful, it’s not legally binding. Its determinations are not accepted by employment tribunals or courts.

One major limitation is the lack of mutuality of obligation analysis, which HMRC has acknowledged as “work in progress” since 2017. Remember HMRC’s planned updates, CEST 2.0 (OCELOT).

Refer to the CEST section of the Employment Status Manual (ESM) and other resources to better understand the complexities of IR35. Ensure your working arrangements accurately reflect your employment status.

Practical steps: How to determine IR35 status

Here’s a practical, step-by-step approach to determining IR35 status:

1. Carefully review your contract: Examine clauses related to control, substitution, and mutuality of obligations. Discrepancies between the contract and actual working practices raise red flags. Your contract work should always reflect the current status review. Your work contract may include information on notice periods or other stipulations.
2. Assess your working practices: Honestly evaluate your daily work. How much control does the client have? How integrated are you into their operations? Consider all income tax and national insurance contributions that your status assessment will inform.
3. Use CEST with caution: HMRC’s CEST tool can be a starting point. However, be aware of its limitations, particularly the missing MOO element. CEST determinations are not definitive. Ensure you also understand ir in full to ensure you are working appropriately.
4. Seek professional advice if needed: Consult a tax specialist for clarity if you’re unsure about your IR35 status. There are multiple places with suitably qualified individuals to understand ir status for you, as per any intermediary’s legislation.

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Conclusion

We’ve covered how to determine IR35 status – it is a detailed process, requiring careful review of your working arrangements, contracts, and understanding of HMRC’s guidelines. This involves assessing every detail.

Maintaining a clear audit trail with company stationery of your costs incurred and private sector business insurance will be invaluable, in case of an investigation. Your contracting business will want to provide proof that the specific task being undertaken, as set out in the original contract work, justifies that you are truly ‘outside’ ir35.

By following the steps and information in this guide, you can confidently assess contracts and potentially challenge past evaluations.

It is also important to ensure that the working practices of those connected to you in the supply chain do not suggest otherwise either and they have, and understand, their status too and keep adequate stationery for a small business.

The off-payroll working rules impact contractors in both the private sector and those working as sole traders, particularly when engaging with small businesses.