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IR35 overview

In principle, IR35 states that if a work provider provides personal service then they are a disguised employee of the client and should then be subject to the same tax and national insurance deductions as any other employee.

There have been hundreds of cases in tribunals and courts that have considered employment status. The landmark case was the 1968 High Court decision in Ready Mixed Concrete v Ministry of Pensions and National Insurance. Employment law cases are relevant to the IR35 discussion.

The trinity to establish that a work provider is not a disguised employee are:

  1. Substitution

    When an individual is directly employed, he/she is expected to provide personal service.  A direct employee works under a contract of service.  A commercial business on the other hand, be it a limited company or partnership undertakes a contract for services.  Substitution is therefore very important.  If a person does not have to provide personal service, but instead can provide a substitute in their place, then that person is not an employee.  The contract needs to reflect this and the substitution clause must reflect the commercial reality of the relationship.  Also, the substitution clause cannot be heavily fettered.

  2. Mutuality of Obligation (MOO)

    Mutuality of obligation is a very important factor in determining the status of the contract.  Mutuality of obligations is concerned with a higher level of commitment , trust and confidence between the party providing the work and the party performing the work i.e. they have a higher level of obligation beyond the mere offer and acceptance of work.  In an employer/employee relationship there is a continued commitment to provide and accept work over a period of time.  To prove lack of MOO the work provider should not be obliged to offer work or the work doer should not obliged to undertake work offered within the duration of the contract.

  3. Control

    The final “irreducible minimum for the existence of a contract of employment” is control.  There needs to be a “lack of control” on ‘how’ the work is performed; this differs from ‘what’ work is performed.  The Client may give direction on the ‘what’ but the Contractor would determine the ‘how’.

Other factors can come into play but are not as important as substitution, mutuality of obligation and control.  These include:

  • In business on own account
  • Intention of the parties
  • Financial risk
  • Freedom of offer services
  • Provision of equipment
  • Employee style benefits
  • Basis of payment

IR35 is a complex area and we have been trained by the IPSE to review contracts and advise on IR35 status.  If you have any further questions or require a contract to be reviewed, please contact us.