Employee or Contractor? An IR35 Case Study
Potential problems and grey areas
- The description of the contract with Alan is the description of an arm's length service agreement for the design and build of a website. This is an agreement with a 'service provider' not obviously with an individual contractor. It's therefore easy to see why it passes the assessment tests. LawBite provide a number of templates which you can use if you work as a contractor or freelance.
- The service provider could as easily be a firm of web designer/builders working from their own offices, who come into the manufacturer for progress meetings or to receive instructions only.
- As Alan works independently from home then it also serves as a very clearly delineated image of a contract which escapes IR35 regulation, but it does so because the task, and the way in which it is delivered is one typically delivered by an independent service provider, not because it is an accurate and discreet image of an individual working through a Personal Services Company ('PSC').
- Jemima is clearly an employee. She works on an on-going basis and is paid overtime if she works outside regular office hours. There is therefore mutuality of obligation and payment issues.
- She can only work for other clients when she's not obliged to work for the manufacturer and then only with the agreement of the manufacturer. The manufacturer, therefore, exercises control over her availability.
- The rest of the description of Jemima's activities might equally apply to a contractor in a way which would not be subject to IR35 regulations, because:
- Jemima works on the provision of a limited service - the maintenance and content of the manufacturer's website - if she had a one year contract and was paid a flat hourly or daily rate for this and, was perhaps also obliged to update the site by a specific date each month, then this would not be inconsistent with a role not subject to IR35;
- Jemima 'reports' to the head of IT. If the contract were given to an external business one might expect the head of IT to manage the relationship and the external web agency to 'report' at some level to the job-holder and follow corporate design guidelines in delivering its services. The extent to which the manager directs Jemima's work on a day by day basis is not clear. If she agrees a general approach to her tasks each week/month and then delivers the services, adhering to corporate web design guidelines (as may have been agreed between the head of IT and Alan) when delivering her services, this could equally well indicate that Jemima is an independent consultant;
- Jemima works from home 'with permission'. Another way of putting this would be 'by arrangement' or 'by agreement'. There is a very grey area in the middle. The company could dictate the terms of the contract to the contractor on the basis of what was important to the company. It still doesn't mean that the relationship was that of employer and employee.
How might a business deal with the changes?
What this means for consultants
- The criteria on which the status of a hire is assessed by HMRC is a blunt instrument at best and, always was. There is so much latitude in the interpretation of the rules that assessments become a subjective judgment. The answers to certain questions - is the contract limited in time? does the contractor contract with a business by which they were previously employed? does the contractor carry professional indemnity, public liability and employer's liability insurance? and, does the contractor control their relationships with other parties and market themselves through various recruitment business without reliance on one client or one recruitment business? - should be sufficient to prove a level of independence;
- A consultant working in the way Alan does in the above example, typically doesn't pay tax at a PAYE level of someone who is fully employed but the latter doesn't accept the risk of regular and repeated periods of being without work as businesses' budgets and Brexit uncertainty may dictate; and
- A fully employed person doesn't accept the risks of commercial business to business contracts or the liability which may fall on them if the requirements of the businesses for which they work are found by the tax authorities to create a relationship of reliance.
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