New IR35 Test for Contractors
After the recent court victory for a contractor over IR35 we have devised a new IR35 test for contractors based on the court verdict.
After that court verdict the current IR35 test has lost all credibility.
HMRC decided to prosecute a contractor over IR35. They believed him to be inside IR35 on all three major IR35 factors. These are:-
- The Right of Substitution
- Mutuality of Obligation
- Supervision, Direction and Control
Instead the judge found contractor Mr Wells outside IR35 on all three counts.
HMRC IR35 Test for Contractors
Some how can HMRC create a definitive test for IR35 when they so clearly don’t understand it themselves?
Remember that they have a vested interest in the results of the test. The more contractors who fail it the more cash HMRC get.
Anyway, here’s a new test based on the recent court verdict.
IR35 Factors – Right of Substitution
- Do you have a right of Substitution Clause in Your Contract?
2. Has there been a time when there was an opportunity to use a substitute and either you couldn’t provide one or your client wouldn’t accept the substitute?
If the answer to the two questions above are Yes and No then you are outside IR35 on the count of Right of Substitution.
HMRC believe this to be a sham. However, two separate judges have ruled that it must be taken in good faith unless HMRC can prove otherwise.
Mutuality of Obligation
This is where there is an obligation for the freelancer to do the client’s work and an obligation for the client to pay the contractor.
- Do you have a fixed term contract with your client?
- Do they have an obligation to provide you with work after your current contract ends?
If the answers to these are Yes and No then, according to this judge, you are outside IR35 on this count.
Minimal Mutuality of Obligation
Although the client had to pay the contractor for the period of the three months contract he had with them, and the contractor had to do the work, the judge ruled that Mutuality of Obligation was minimal.
After all, the company has to pay permanent staff on an ongoing basis and not just for three months.
Whereas HMRC prefer to see any similarities in the work practices of a freelancer and a permanent employee, this judge saw the differences as more important.
And then ruled that Mr. Wells was outside IR35 on the Mutuality of Obligation IR35 Factor.
Supervision, Direction and Control
- Does the company exercise the same or less control and supervision on you than a permanent employee?
- Do you go to staff meetings?
- Are your more able to get on with your work without help than a permanent employee or just the same?
- Could the company move you to another project or another part of the company without the agreement of yourself and your agency?
If you can answer Less, No, More Able and No to those questions then you are outside IR35 on this count according to this judge and her verdict.
Contractor and Employee Differences in Way of Working
Again HMRC looked at similarities between the way this contractor operated and the way permanent employees operate.
As they worked in similar roles on projects then HMRC saw the contractor as inside IR35.
However, once again, the judge preferred to look more at the differences in the way that the contractor operated.
HMRC thought they would score a 3-0 win against the contractor on he three main IR35 Factors. However, the judge ruled it was a 3-0 win for the contractor.
Minor IR35 Factors
There are 9 more minor IR35 factors and the judge ruled in favour of the contractor on a couple that she thought relevant.
- Is there anything in your contract that prevents you from doing work for other clients?
- Have you any Professional Indemnity Insurance?
- Do you get any Benefits from the Company?
- Do you get any Training from he company?
Did you answer No, Yes, No and No to the above questions?
Outside IR35
Then you are outside IR35 even on some of the more minor factors.
Permanent employees have it expressly in their contracts of employment that they can’t do work for other companies.
They don’t have to take out Indemnity Insurance.
They get lots of benefits from the company like holiday pay, sick pay and pensions. Freelancers don’t get these from the company.
Permanent employees also get the training needed to do the job. Freelancers must arrive at the company with the skills needed already.
Unofficial IR35 Test for Contractors
Of course this IR35 Test for Contractors, above, is not official in any way.
However, it is based on the most recent court verdict.
And I would bet that it would be a lot closer to the truth than the one that HMRC are forcing pubic sector contractors to take.
Government department hirers are using this test as the definitive statement as to whether a contractor is inside IR35 or outside it.
Yet, this case shows that HMRC fundamentally don’t understand the IR35 laws. It looks like they interpret it in their favour.
However, their IR35 test, and interpretation of IR35, has no basis in law – as this judge shows.
it should be scrapped. Another one should be created by a panel with a judge at its head.
IPSE or one of he big Accountancy Companies that look after contractors should create an alternative IR35 test. It should be based, like mine, on court verdicts. The most recent should be given the most weight.
Luckily this contractor took out IR35 insurance and so had all the help to fight his case in court.
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