How is IR35 status determined?

Despite what we all read on social media, there are no “top 5 hacks” to get you outside IR35, nor are there tripwires that trigger an inside IR35 verdict. Your status isn’t determined by a set of prescriptive IR35 rules, a flowchart, or a checklist. Instead, like many aspects of our legal system, it’s about taking a holistic approach based on judgment, to form a balanced view. For those of you who like certainty, the bad news is that status is not black and white. You’ll likely land somewhere on a continuous spectrum somewhere between ‘strong outside’ and ‘strong inside’.

To muddy the waters further, key determining factors for one individual may be less important for another in a different situation. The approach for determining status is one of considering the whole engagement, in context, and understanding how things work in practice. Tax judges have described this by saying you need to paint a picture using the details, then stepping back to make an informed decision from a distance.

Given there are no fixed checklists, determining your status suddenly feels quite intangible. But even given this, it’s relatively straightforward to gain an overall view of your status, with a high degree of confidence. To do so, we need to consider the three primary factors in determining your IR35 status and three secondary factors.

Primary IR35 Rules / Factors

  • Mutuality of obligation – are you paid for simply being ‘available’ for work, even if your client has no work for you?
  • Substitution – is it contractually possible for you to send someone else to complete the work?
  • Control – to what extent does your client tell you what, where, when and how to work?

Secondary IR35 Rules / Factors

Again, there are no hard and fast rules around these factors – you certainly don’t need to ‘pass’ all of them. It’s perfectly possible to be outside IR35 having ‘failed’ one or more of these primary factors, given the strength of other factors.

What is a given, however, is that the primary factors are more important than the secondary factors, and are considered by tax tribunal judges first. If, after reviewing the primary factors, you’re found to be inside IR35, it’s unlikely that the secondary factors will salvage your position.

A final word of warning: having an ‘outside IR35 contract’ on paper is not a strong enough defence should HMRC decide to investigate. Your actual working practices need to reflect what your contract says. If the reality is different HMRC (and tax judges) will use your day to day working practices instead of your contract to establish your status.

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Between now and April 2021: walk the IR35 walk

Act now and take the time to understand these six factors, and what the reality of each one looks like. Look for opportunities to change your working practices if needed (check out our tips), and to re-enforce and continue to practice the good habits you’ve already established.

Remember, between now and April 2021, someone in your client’s organisation will review you and your working practices to establish your IR35 status (read more about the changes coming in April 2021 here). It is likely they will do this without consulting you, therefore the only data point and evidence they will have will be gained from your day to day interactions with them. You now have a single-minded objective: establish a clear and obvious gap between you and your client’s employees.

It’s more important than ever before to understand IR35 and walk the walk, every day. Be pedantic: remind your hiring manager that you can’t attend that team training day, if they say you can finish early then politely decline, ensure your email signature states you’re a contractor, overtly keep a knowledge transfer document up to date should you need to send in a substitute.

When the time comes for your hiring manager to undertake an IR35 status assessment, it should be very clear to them, based on your behaviours, which answers to select. And those answers should correlate with your journey to being outside IR35: we cannot emphasise enough the importance of acting in a manner that is consistent with your desired status.

Next → Up next in this guide: Mutuality of Obligation

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