Exploring IR35: When does a contractor become an employee?

  • What is IR35?
  • The differences between contractor and employee
  • The questions you need to ask

Michael Godsmark,

June 1, 2018

When is a contractor not a contractor? When they’re an employee, of course.

Knowing whether you or someone you’ve hired is a contractor or an employee in the eyes of the law can make a huge difference, whichever side of the working coin you’re on. Employees have more workplace rights, but contractors are liable to pay less tax.

Wise to this, HMRC have a very specific tax law, covering contractors who may be ‘disguised’ as employees. IR35 – introduced in 2000 but overhauled last year – is much maligned and unpopular with contractors and businesses alike! If caught under IR35, the contractor will be taxed as though they were an employee and could cost them up to 25% of their net income.


They will find you, and they will tax you

A lowly contractor seems like small fry compared to the huge corporations keen to avoid tax (*cough* we’re looking at you, Amazon) but the tax office are keen to enforce it. In February this year, HMRC took former Look North news presenter, Christa Ackroyd, to tribunal, arguing that she was actually an employee of the BBC, not a contractor. They won their case, and claimed she owed unpaid taxes to the eye-watering tune of £419,151. Bad news indeed!


What you need to ask

Telling the difference between a contractor and an employee can be tough, and the way you see things could be very different to the way HMRC sees things. But there are some questions to help you determine where you stand.


  1. Who has control of the work?

Does the client control what and how you do it? If they dictate your working hours, place of work or give specifics of how the job must be completed, this shows they have some level of control over your input and you could be seen as an employee. Likewise, if your work is supervised in any way or it has to be scrutinised and signed off before you can crack on, this is not indicative of self-employment.


  1. Is there a mutual obligation for work?

Mutuality of Obligation (known under the snigger-worthy acronym of MOO) is a key concept used by HMRC in defining the contractor/employee conundrum. It applies if the client is obliged to keep providing work and the contractor is obliged to take it. To put it into context – are you often given work to do outside of your skill set and expected to complete it? Or are you able to turn down offered work at your discretion? A self-employed person is free to do the latter, but employees are not (unless they want to be pulled into the manager’s office for ‘a quick chat’).


  1. Can you be substituted?

This concept lies in the basis that an employee will provide their personal services to a company, but a business will provide a general service to get a particular job done, no matter who undertakes it.

If you’re allowed to send someone else in your place, or draft in others to do the job you’ve been contracted for, then congratulations, you’re a contractor. If the client states that it just has to be you and you alone, you’re entering into murky waters. This can be a tough one if you have very niche skills, and clients will often write a veto into any contract that they’re allowed to reject any substitutions you offer, on reasonable grounds.


  1. Are you part of the furniture?

In an investigation, HMRC will look at how well integrated you are in the company. This could be anything from wearing the company’s uniform and having business cards with the company’s logo on it, to having your own desk, or being invited to the Christmas shindig. If it looks like you’re part of the team rather than a temporary addition, this is definite IR35 territory.

When it boils down to it, your involvement in the company will be looked at as a whole, and if you have any doubts as to your employment status, it’s best to get them cleared up sooner rather than later. Nobody wants that brown envelope from HMRC!


We’re here to answer your burning tax questions. Give us a call today to find out more.

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About The Author

Michael is an enthusiastic and cheerful individual who, when not hard at work, enjoys mountain biking, cooking curry and travelling to new places.


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