What are the factors that determine your employment status? In case of an IR35 investigation various factors play an important role to establish employment status. HMRC will consider the following factors during any such investigation. But the weightage of each factor will vary according to industry and kind of work. Previous status ruling One of the most obvious factors that decides your employment status is the previous status ruling made by Inland Revenue or in some cases Department of Social Security. Once they have evaluated your employment status on previous visit, the Revenue may not show diligence to look at the contract or bother going through the questionnaire at all. Although such status related decisions can be challenged but it costs a lot and in the end you can never be sure if the courts would actually decide to overrule a decision that was made years ago. Contract Your contract with the client can be written, oral or even implied. It is the one single document that defines rights and duties regarding the job undertaken. The language and wording of your contract plays an important role in deciding your employment status. However, it has to be kept in mind that the Revenue will also look at certain working practices along with contract when looking at certain industries even if such practices are not part of contract inclusively. A contractor signing a contract with a client from such an industry would be expected to know these practices. As an example consider any regular contract operating within motor industry. You will hardly find a contract detailing certain holidays such as Christmas break and ‘industrial break’. Such holidays are considered rather customary practice and parties signing contract are expected to know these breaks. When the Revenue accepts a contract it examines it by challenging different clauses in order to determine whether or not the clauses have actually happened or they have been included only the make the contract look like one of self-employment. One of the most common examples of clauses which are tested is that of substitute clause which often is included only to shadow the contract as one of self-employment when the actual contract is that of employment since substitution never really happens. Mutuality of obligation (MOO) ‘Mutuality’ was first discussed in famous Carmichael and Another V. National Power Plc case. The pleading parties accepted work as guides. The contract clearly stated that the nature of employment would be casual and as needed. However, the contractors showed on the company payroll. As a result the contractors brought a case that nature of their contract makes them self-employed instead of company employees as assumed by the company. The court held in favor of contractors since there was no obligation on the behalf of the company to provide work and similarly there wasn’t any obligation on the part of the contractors to accept the work. In case of employees there is an understanding and obligation of regular employment until they are rendered redundant due to change in operations or large losses. Control Control is a major factor in determining employment status when there is an IR35 dispute as obvious from McMenamin V. Diggles case. Mr Diggles, who was a clerk at a chamber. He was first employed and taxed as a regular employee but later terms of his contract were changed so that he would provide clerking services for certain members of the chamber for a fixed fee. He could either perform the work all by himself or have it done through someone else. He could also provide a substitute to get the work done under the new terms of the contract. When the employment status was disputed, it was decided that Mr.Higgins is self-emplyed. The test were used to determine control of Mr.Diggles over the nature and manner of work. Since he could provide a substitute, provide service as he deemed fit and there were no fixed work hours, he was thought of not being controlled by the contract. Substitution and exclusivity Substitution and exclusivity have become the main point of discussion among contractors due to recent IR35 cases where both these factors were given heavy weightage when deciding about nature of employment. If a contract allows substitution i.e. the contractor/employee is not bound to exclusively provide his own skill or work by himself, then it will be a matter of self-employed. Financial risk and payment Financial risk and payment terms are one of the major factors that decide whether a contract is that of employment or self-employment. It implies when a contract puts the financial risk on contractor/employee, then such contract is that of self-employment. For example if a contract allows for substitution then there is a chance that the substitution could cost more than what the contractor is being paid by the client. In this case there is a financial risk that the contractor can lose money. Similarly when payments for services is based on the percentage that client is making, the contract is usually considered that of self-employment as it presents financial risk of not making any money at all. Equipment Equipment is another important factor that often helps the Revenue decide on the nature of employment under IR35. Usually contractors are supposed to use their own equipment in order to complete the work. However, the Revenue will expect large tools and major equipment to be provided by the client. The responsibility to take care of upkeep and maintenance of equipment also plays an important role in deciding the nature of employment. Intentions of the parties As seen in the questionnaire provided by the Inland Revenue, intention of the parties plays an important role in deciding whether certain contract falls under IR35 or not. The questionnaire asks if the employer had the intention of self-employing or employment. Some experts think that there is no point including such questions as the answers will be ignored and they won’t really impact the outcome of a decision on IR35 status.
Posted on: Fri, 26 Dec 2014 21:18:16 +0000
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