Being Outside IR35 – Why Emma is outside IR35

Being outside IR35 - Here is an example of one small businesswoman who is deemed by HMRC to be outside IR35

Being Outside IR35
Being Outside IR35

Being Outside IR35

Being outside IR35 is crucial to the financial health of IT Contractors. This is an illustration from HMRC to show why an imaginary freelancer called Emma is outside IR35.

Emma is the sole director, worker and shareholder of E Ltd and contracts through an agency and has been with the client for 3 6-month contracts who has been her sole client all this time.

She does fixed price work for them and gets paid only when milestones have been met.

There is no overtime provision mentioned in the contract but if she does have to do extra work the client makes special payments usually at premium rates negotiated as and when.

No Substitution Clause

The contract names Emma as the person who does the work.

The client did a quick background check on Emma before interviewing her.

There is no substitution clause between the agency and client but one between E Ltd and the agency.

Emma is highly skilled and gets a free hand over the work and it is her choice where and when she works.

E Ltd has an ISO certificate and has invested in training and taken out Liability insurance. She pays for accountancy and advice.

The end client would not give notice if it wanted to end the engagement.

Making Good Mistakes at Own Expense

Under the contract, E Ltd has to make good any mistakes at its own expense.

In the contract E Ltd has to supply all the equipment although this hasn‘t happened in practice and the client has supplied it.

Emma meets with the client‘s Project Manager every Friday to discuss progress separately from the permanent members of staff and in a different way.

If she cannot attend she informs the Project Manager but only out of courtesy.

Reasons why Emma is not caught for IR35 Tax

1. Direction and Control

– She decides when and where she works which is a strong pointer against being caught by IR35
– She decides when she attends and only tells the end client out of courtesy. She can‘t be made to attend by the client
– The end client tells Emma what to do but this happens often and is not a clincher for IR35 applying
– Emma is highly skilled but the client doesn‘t tell her what to do so this is neutral
– She has weekly progress meetings with the PM but that is natural so this is neutral

2. Right of Substitution

The client wouldn‘t allow a substitute to do Emma‘s work so this would be a pointer towards IR35.

3. Other Factors

Because it is fixed price work E Ltd is taking a financial risk as it only gets paid when milestones are met.

If she finishes ahead of schedule it is more profitable and she can take on more work from other clients.

If she finishes behind schedule she loses out so there is a financial risk which points to IR35 not applying.

Having Professional Indemnity Insurance and paying for Training are small factors which show IR35 does not apply as employees wouldn‘t do this.


To narrow it down, Emma is basically taking a financial risk by doing fixed price work and she does it how and when she wants and so is not controlled by the client.

IT Comment

Sadly, Emma is not typical of IT Contractors and very few IT Contractors do fixed price work.

The vast majority of them work for a daily rate although the control may vary.

So, this scenario would be pretty little help to most IT Contractors. However, it is useful to see HMRC’s thinking.

Being outside IR35 is very important to small businesses.

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For all critical IR35 news and advice for contractors click on IR35 News.

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