Pro Tip: Understand Employment Status for Accurate Determinations

This pro tip is for everyone

Context

Accurate status determinations are the cornerstone of compliance with the off-payroll working rules (IR35). Misclassifying a worker’s status can lead to disputes, unexpected tax liabilities, and reputational damage. IR35 Shield has tools to help you avoid these risks, but it’s essential to understand and correctly apply the key employment status indicators to your IR35 engagements.

*Pro Tip* - Develop a solid understanding of the key status indicators.

Here's what you should know:

1. Personal Service / Substitution::

   Is the contract for delivery services, whereby the client is agnostic about who does the work to meet the deliverables? Or does the client want a specific person to do the work, and have an unqualified right of veto if you seek to use someone else to carry out some or all of the work? If the client has an unqualified right to reject substitutes, and the contract is for the supply of a person, not services, this suggests personal service is required.

2. Mutuality of Obligations:

   In addition to payment if work is done, can the worker get paid just for turning up, even though work is not offered? Is there a contractual obligation for work to be offered by the client and for the worker to accept it? A contract where the worker must turn up, and the client must pay for presence, whether they offer work or not is a strong pointer towards a contract “of service” (Inside IR35) as opposed to “for services” (Outside IR35).

3. Control:

   Examine who has the ultimately contractual authority to decide how, what, when, and where the work is done. If the client has the right to control the worker's schedule, tasks completed, methods, or location, this can, depending on the degree of control, indicate the engagement is more towards "inside IR35."

4. Other factors:

   Other factors are also crucial when considering the overall picture for a status determination. Is there a right to exclusivity over the worker? Does the client have “first call” on the services? Does the worker manage the clients staff? Is there pastoral care being provided? Does the worker have their own office and/or substantial equipment? Is there a history of similar work with other clients, or other concurrent clients for similar work?

Action Steps:

• Work closely with hiring managers to establish the facts when answering status questions around these indicators for specific roles.
• Pay careful attention to the contractual rights and obligations of the parties, which take precedence over the subjective intentions of the parties.
• Document your findings as to why you have chosen a particular answer to a status question, including supporting evidence, to help provide a comprehensive record of the reasoning behind your status determinations.

Why this matters

By using robust tools and thoroughly applying these methods, you reduce the likelihood of making incorrect determinations that could lead to HMRC challenges or penalties. You also demonstrate that your organisation has taken reasonable care, which mitigates the risk of extended liabilities and any penalties.