IR35: Employment status for tax purposes

In our first IR35 article we referred to an “employment relationship”. We will define this a little further here so you can begin to understand how work status is determined. Also bear in mind that IR35 rules are contract dependent so you may have a percentage of your income falling inside IR35 and some of it outside.

Employment status for tax is the question of whether someone is employed or self-employed for tax purposes and determines the taxes the individual and engager are required to pay.

There are three key areas that will help you work out employment status for tax purposes.

Supervision, direction, control: How much say does your client have over your work? For example, do you have set hours? This might imply employment. Do you have a team that reports to you within the company? To work outside of IR35 you’d need to have freedom over how and when you complete the work and not be bound by start and finish times. The extent to which you are guided/managed by the employer also impacts on your status.

Substitution: Could someone else take over your role? If not, this could be construed as employment. If a client only wants you to do the work then you are likely to fall inside IR35. Having alternative contacts to transfer the work to is a good way to demonstrate you are outside IR35.

Mutuality of obligation: If your employer is obligated to give you work and you are obligated to accept it then, again, it suggests employment. Working for several clients is a good indicator that you are outside IR35.

Other factors which may indicate you are outside IR35:

· You use your own equipment, have your own premises and website

· You take financial risk for your work

· You are paid project-by-project

We have created a diagram that explains this a little better - you'll find it on our resources page here.

HMRC status checker

Determining status is appreciating and balancing a combination of the above points - so you can see why it isn’t always clear. As mentioned before we recommend that you also use the HMRC status checking tool “CEST” (see below for link) as this is helpful and HMRC usually stands by its outcome.

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HMRC Status checker

Useful HMRC information

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