Your IR35 status isn’t determined in advance by HMRC, a fixed set of rules or some other official government-created process or body. Instead, somebody, somewhere needs to make a call on your status and make sure you’re taxed appropriately. In some cases, it might be you who takes responsibility for this, but from April 2021, more often than not it will be your end client.
If HMRC thinks the wrong decision has been made, they’ll investigate after the fact, and may decide that back taxes need to be paid. It’s like an honesty box, with HMRC watching now and again via CCTV.
How does this work in practice?
There are three main ways that IR35 status is normally determined:
- By an individual, in-house (or by you)
- By a third party adviser / assessor / IR35 expert
- By using HMRC’s tool, CEST
The assessment needs to be done on a case by case basis (so-called “blanket assessments” are not lawful), and the IR35 status of each contract needs to be assessed. This means that your IR35 status can vary between client to client, contract to contract. Each time you start a new contract, the status needs to be assessed.
The relationship between you and your client is examined in six different areas to see if you are inside or outside IR35. These areas are:
- Mutuality of obligation
- Right of substitution
- Being in business on your own account
- Part and parcel
- Financial risk
For a deeper dive into these six areas, watch this introductory video.
Your contract and working practices
The starting point to determine your status is to study the contract between you and your client. This is often used to make the initial determination. One thing to keep in mind is that if you operate via an agent, there may be an “upper-level” contract between your client and your agent, which you don’t normally get to see. This contract can have an impact on your IR35 status.
But your IR35 status isn’t just based on your contract. You also need to consider the reality of your actual working practices. Should HMRC investigate, they will look to find any differences between your contract and day to day practices which betray your status.
Rooted in case law
The biggest challenge in determining IR35 status is a lack of a statutory definition for being an employee versus being self-employed. Instead, we have to look back at case law, which spans decades. That’s why it’s difficult to build automated tools to check your status, and why it is possible for two different people to have two different opinions on your status.
Our recommended approach is to first use automated tools to get an indicative view of your status. If your case is then borderline, an expert should be used to provide their opinion.
Being outside IR35 is a way of life
One thing to keep in mind is that there is a big gulf between technically outside IR35, and actually being outside IR35. Consider operating outside IR35 as a mindset change: one of ensuring you are always adopting the view of a business owner who is making business choices. You are not an employee.
For a deeper dive into the mindset for operating outside IR35, read our section on mindset and tips for being outside IR35.