IR35 – are they deemed employees?
The principles of IR35 are intended to combat tax avoidance by consultants and the organisations hiring them, where those individuals are using intermediaries (such as their own limited company) to supply services to clients. The IR35 rules ensure that consultants using such intermediaries, who would have otherwise been considered employees if they were providing their services directly to the clients, pay similar levels of income tax and national insurance as employees.
Since April 2021, all medium and large clients who contract with individuals to provide services via an intermediary are themselves responsible for determining the status of these individuals for IR35 purposes.
In considering whether IR35 applies, it must be determined whether the relationship between the individual and the client can be described as deemed employment. The test for this was established in Ready Mixed Contract (RMC). There will be a deemed employment relationship where:
- there is a requirement for personal service;
- there is a sufficient degree of control over the individual;
- there are mutual obligations on the parties to each other; and
- the other provisions of the contract are consistent with an employment relationship.
The personal service requirement will ordinarily be met, provided there is not a complete right to substitute personnel or subcontract services. Control relates to how the services are provided, for example supervision, dictation of hours, and the client being able to move the worker from one job to another are all indicative of sufficient control. Mutuality of obligation requires that the employer is obliged to offer work to the individual and the individual is obliged to do the work offered; the relationship must be reciprocal.
Recently, the Court of Appeal dealt with appeals regarding IR35 for the first time, in the cases HMRC v Atholl House Productions Ltd and Kickabout Productions Ltd v HMRC.
In both cases, the Court of Appeal emphasised that while the presence of control and mutuality of obligation are necessary pre-requisites for employment, they do not create a presumption of deemed employment. Even if there is personal service, control and mutuality of obligation, the court must still conduct an examination of all factors consistent and inconsistent with employment, before assessing whether a deemed employment relationship exists.
The Court of Appeal held in favour of HMRC in both of these cases finding that tax should have been deducted from payments made. This demonstrates how important it is that employers understand the law and apply the correct approach when determining whether deemed employment status exists. Employers should conduct and document a careful analysis of all the relevant factors when considering whether a worker has employment status, which we can help with.
It has also now been a year since the April 2021 changes to IR35. The government promised they would not be heavy handed in the first year of these changes, giving medium and large organisations time to adapt to the IR35 regime. This has not passed, meaning that it is essential that employers have a clear understanding of the IR35 rules and how they apply to their workers. If you do not yet have this in hand, we would recommend you contact us for urgent advice.
If you would like any assistance establishing the IR35 status of your contractors, please contact: [email protected].