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IR35 case studies

Helping you prepare for the changes to IR35 which are due to be implemented in April 2020.
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Charities

Helpers is an incorporated registered charity. Helpers engages the services of Charlotte, an IT specialist, to provide IT services. Charlotte contracts with Helpers via her own limited company: CRS Ltd.

Helpers has an annual turnover of £8 million plus £4 million of donations, 60 employees and balance sheet assets of £2 million.

The changes to the IR35 rules will only apply to medium or large organisations. A corporate entity, such as Helpers, will be medium or large-sized if it meets at least two of the following criteria for two consecutive financial years:

  1. turnover of more than £10.2 million
  2. a balance sheet total (assets) of more than £5.1 million
  3. an average of more than 50 employees

In this case, Helpers meets condition c, but not condition b. Therefore, if condition a is met then Helpers will be medium or large. Helpers has a turnover of £12 million including donations. However, charities do not need to take into account donations when calculating turnover for the purposes of determining their size for the IR35 rules.

As Helpers’ turnover is £8 million without donations, this condition is not met and Helpers is not considered medium or large for IR35 purposes. Therefore, Helpers has no obligations under IR35 with regards to the engagement with Charlotte.

What happens if the individual contracts directly with Helpers?

Let’s say that Charlotte does not contract through her own company (CRS Ltd) and instead contracts directly with Helpers.

In this scenario of direct engagement, Helpers have (and have always had) a responsibility to ensure that Charlotte is being treated correctly for tax and legal purposes.

The employment status principles are the same regardless of whether an organisation is considering IR35 or normal employment status. In reality, the question is whether or not Charlotte is working like an employee of Helpers. This is the same question that would be asked if Helpers was in scope of the IR35 changes from April 2021.

In this scenario (without a limited company), if Charlotte is working like an employee, HMRC are entitled to seek back taxes from when Charlotte started her engagement with Helpers (the number of years they can go back will depend on whether the error is reasonable, careless or deliberate).

Determining employment status

In the scenario of Charlotte contracting directly with Helpers, Helpers will have to determine whether Charlotte should be an employee or is self-employed. To do this, Helpers must consider the employment status rules, which are captured by case law principles, or ‘factors’. When doing so, they must consider the contractual terms and the reality of the working arrangements.

The contractual terms and arrangements.

  • Charlotte cannot substitute (and pay) someone else to deliver the work – Helpers require her to do the work.
  • Charlotte reports to the Head of IT, who is an employee of Helpers. The Head of IT checks and reviews Charlotte’s work before it is implemented and undertakes quarterly performance reviews.
  • Charlotte charges an hourly fee for her services.
  • Charlotte uses a Helpers email address and usually works from the Helpers’ offices with other Helpers employees, but Helpers do allow her to work from home when she wants to.
  • Charlotte isn’t contracted for a set number of hours, but usually works 5 days a week for around 30-40 hours. She does not provide other similar services on a self-employed basis.

Considering the working arrangements.

  • There is personal service as Charlotte has to perform the work herself.
  • While she isn’t controlled day-to-day, there is an underlying right for Helpers to move her from task to task and step in to check her work. They can also tell Charlotte where to carry out the work, even if they allow her to work from home when she likes.
  • The hourly fee remuneration structure does not provide Charlotte with the opportunity to benefit or lose out if she completes the work more or less efficiently than she anticipates.
  • Charlotte wouldn’t be presented to customers or suppliers of Helpers, but she is integrated into the organisation of Helpers given her email address and position within a line management chain.
  • Charlotte does not have a business structure or provide similar services to other clients.

Weighing up these factors in the round, it is clear than Charlotte is working like an employee of Helpers. Therefore, Charlotte would/should be an employee for tax purposes if she were directly engaged by Helpers.

Therefore, even though the IR35 rules do not apply to Helpers due to their size, they are still obliged to consider employment status for any workers with whom they contract directly.

School desk

Education

Hatford School is a medium-sized organisation (as per the definition of medium and large for IR35 purposes) and so, from 6 April 2021, has to comply the IR35 rules in respect of contracts they have with workers who are off-payroll.

The school has two particular workers who they need to consider; Lewis – a sports coach, and Harriet – a tutor who helps groups of students prepare for exams. Both Lewis and Harriet contract for their services via their own limited companies: Sports Coaching Ltd and Tutor Help Ltd, respectively.

Pre-6 April 2021

Up until 6 April 2021, this arrangement carries no employment tax obligations for the school, because there is no direct contract between them and the two individuals. However, both Sports Coaching Ltd and Tutor Help Ltd must consider the existing IR35 rules.

Post-6 April 2021

From 6 April 2021, the IR35 rules change. The change places the responsibility on the school (as it is not ‘small’ and so is within the scope of the new rules), as the engager of Lewis’ and Harriet’s services, to determine whether or not they would/should be employees for tax purposes if they were directly engaged by the school.

Determining employment status

To make this determination, the school must consider the employment status rules, which are captured by case law principles, or ‘factors’. When doing so, they must consider the contractual terms and the reality of the working arrangements.

The arrangements with Sports Coaching Ltd regarding Lewis’ services are as follows.

  • Lewis cannot send a substitute to do the coaching, only he can do the work under the contract.
  • Lewis is obliged to coach two hours on Wednesday evenings and two hours every other Saturday.
  • The school pay an hourly fee for the time Lewis spends coaching.
  • Lewis has some freedom of how to run the sessions, but the school insist on which sports much be coached during each session in advance and sometimes send their PE teacher to oversee the sessions for feedback purposes.
  • Lewis uses the school’s facilities and sports equipment to perform the lessons.
  • Lewis is listed as the school’s ‘Sports Coach’ on the school website.
  • Lewis does not perform any other coaching on self-employed basis. He has a full-time job for an IT company and does sports coaching for supplementary income.

The arrangements with Tutor Help Ltd are as follows.

  • The school would permit Harriet to send a substitute, but this is unlikely and impractical due to DBS and safeguarding checks.
  • Harriet can turn down work from the school and the school are not obliged to offer Harriet any work.
  • Harriet is paid a fixed fee for each tutoring session, but the length of the sessions can vary, depending on the progress of the class.
  • The school determines which subjects Harriet tutors on (and the type of exam), but Harriet is free to run the sessions as she wishes.
  • Harriet uses the school classrooms, but brings all equipment and materials, including crib sheets, tests and revision guides, which she creates before the sessions. These contain the Tutor Help Ltd branding.
  • When Harriet’s sessions are advertised to pupils and parents, it is made clear that she is an external person coming in to help the students, rather than a school employee.
  • Harriet provides similar services for many schools in the evening on similar terms, contracting through Tutor Help Ltd.

Considering these working arrangements, the employment status factors can be summarised as follows.

Lewis  Factor  Harriet 
Lewis cannot send a substitute, so there is personal service. Personal service Harriet’s ability to send a substitute is impractical and unlikely, so there is personal service.
Lewis has some control over how he runs the sessions, but the school have the right to step in through their oversight of sessions. Control The school set the brief, but Harriet is free to run the sessions as she see fits.
The school contracts to provide four hours of work each week to Lewis and he is obliged to complete that work. Mutuality of obligation  Harriet is not guaranteed any work and the school is not guaranteed Harriet’s services if she does not want to accept the work.
The school pay an hourly fee, which means that Lewis is guaranteed to be paid for the work he undertakes. Financial risk  Harriet could risk a lower fee if a particular session takes longer to prepare for or deliver than she anticipated.
Lewis does not have to purchase any equipment prior to delivering the sessions.  Equipment While not hugely significant in cost, Harriet provides the materials to be used by the pupils in each session.
Lewis is listed as part of the school on its website and there is no indication that he is an independent contractor. Integration It is clear to the school’s customers (the pupils and parents) that Harriet is an independent contractor.
Lewis has no other clients on a similar basis and no business structure (other than his limited company).  Other business activity Harriet has multiple other clients to whom she provides similar services – this suggests some sort of business structure.
Lewis appears to be working like an employee of the school, even though he only works for 4 hours per week. Conclusion Harriet appears to be working on a self-employed basis.

In these circumstances, the IR35 rules would apply to the arrangements with Lewis, but not with Harriet. However, this has no relation to the type of services they are delivering. In other circumstances, a school could have a ‘self-employed’ sports coach and an ‘employed’ tutor – it is the working arrangements that are important, not the type of services performed.

What happens if the individual contracts directly with the school?

Let’s say that Lewis does not contract through his own company (Sports Coaching Ltd) and instead contracts directly with the school. The IR35 rules will not apply because there is no ‘intermediary’ in the contractual arrangements.

However, in this scenario, the school have (and have always had) a responsibility to ensure that Lewis is being treated correctly for tax and legal purposes.

The employment status principles are the same regardless of whether an organisation is considering IR35 or normal employment status. The only difference is the contractual position, but in reality, the question is whether or not Lewis is working like an employee of the school.

In this scenario (without a limited company), if Lewis is working like an employee, HMRC are entitled to seek back taxes from when he started his engagement with the school (the number of years they can go back will depend on whether the error is reasonable, careless or deliberate). Whereas, for IR35 engagements, HMRC can only go back to 6 April 2021 to collect taxes from the school, as this is when their obligations start.

business people in office

Professional services

Martin is a partner at Marylands LLP – a large law firm. Martin decides to retire and no longer be a member of the LLP. However, he would like some smaller amounts of supplementary income, so Martin agrees to provide legal advice to Marylands LLP and its clients on a reduced basis. Marylands LLP pay invoices gross of tax to his newly formed company Martin Ltd.

Pre-6 April 2021

Up until 6 April 2021, this arrangement carries no employment tax obligations for Marylands LLP, because there is no direct contract between them and Martin. However, Martin Ltd must consider the existing IR35 rules.

Post-6 April 2021

From 6 April 2021, the IR35 rules change. The change places the responsibility on Marylands LLP – as the engager of Martin’s services – to determine whether or not Martin would/should be an employee for tax purposes if he were directly engaged by Maryland LLP. This is because Marylands LLP is a medium or large organisation and contracts for Martin’s services via an ‘intermediary’.

Determining employment status

To make this determination, Marylands LLP must consider the employment status rules, which are captured by case law principles, or ‘factors’. When doing so, they must consider the contractual terms and the reality of the working arrangements.

The contractual terms and arrangements.

  • Martin cannot substitute (and pay) someone else to deliver the work – Marylands LLP require him to do the work.
  • Martin is clearly highly skilled so he is not overseen or directed. However, partners in the LLP would have the ability to review and edit his work before he sent it to their clients.
  • Martin charges an hourly fee for his services.
  • Martin continues to use his Marylands LLP email address, uses Marylands LLP letter headed paper to send correspondence to Maryland LLP’s clients and he will continue to service the same clients as he previously did as a partner.
  • Martin does not provide other similar services to other law firms.

Considering the working arrangements.

  • There is personal service, as Martin has to perform the work himself.
  • While he isn’t controlled day-to-day, there is an underlying right for Marylands LLP to step in and check his work before he delivers it to their clients.
  • The hourly fee remuneration structure does not provide Martin with the opportunity to benefit or lose out if he completes the work more or less efficiently than he first anticipated.
  • The clients of Maryland LLP would consider Martin as working for Maryland LLP rather than as an independent contractor, so Martin is very much integrated into the organisation of Marylands LLP.
  • Martin does not have a business structure within which the services to Marylands LLP are provided.

Weighing up these factors in the round, it is clear than Martin is working like an employee of Marylands LLP. Therefore, Martin would/should be an employee for tax purposes if he were directly engaged by Maryland LLP. This means that the engagement would be inside IR35 and PAYE/NIC should be deducted from payments for Martin’s services.

Marylands LLP must send a Status Determination Statement to Martin to inform him of this decision and the reasons for it. When making payments to Martin Ltd, Marylands LLP must process them through the payroll as if Martin was an employee for tax purposes. However, as there is still no direct contract between Marylands LLP and Martin, there are no employment law responsibilities for Marylands LLP.

Alternative scenario

If instead, the contractual terms and arrangements were different, for example:

  • Martin and Marylands LLP agree a fixed fee for each project he undertakes.
  • The work is delivered on Martin Ltd branded material, which Marylands LLP can use and/or paraphrase when delivering advice to their clients.
  • Martin has full control over the work and Marylands LLP cannot review, check or edit his outputs (although of course they are free to use his outputs how they choose).
  • Martin does not often deal directly with Marylands LLP’s clients and if he does, it is clear that he is an independent contractor and not part of Marylands LLP, including that he does not have a Marylands LLP email address.
  • Martin also provides legal advice to other clients at the same time and employs a junior to assist him on more simple legal matters.

Here, the circumstances are different as there is no control over the work, there is financial risk (or an opportunity to profit if the work is completed more efficiently than expected), Martin is not integrated into Marylands LLP’s organisation and Martin offers similar services to many other clients.

None of these factors on their own will determine the relationship between Martin and Marylands LLP, but considered as a whole, Martin is not working like an employee. Therefore, the engagement would be outside IR35.

What happens if Martin contracts directly with Marylands LLP?

If Martin does not contract through his own company (Martin Ltd) and instead contracts directly with Marylands LLP, the IR35 rules will not apply because there is no ‘intermediary’ in the contractual arrangements..

However, in this scenario, Marylands have (and have always had) a responsibility to ensure that Martin is being treated correctly for tax and legal purposes.

The employment status principles are the same regardless of whether an organisation is considering IR35 or normal employment status. The only difference is the contractual position, but in reality, the question is whether or not Martin is working like an employee of Marylands LLP.

In this scenario (without a limited company), if Martin is working like an employee, HMRC are entitled to seek back taxes from when Martin started his engagement with Marylands LLP (the number of years they can go back will depend on whether the error is reasonable, careless or deliberate). Whereas, for IR35 engagements, HMRC can only go back to 6 April 2021 to collect taxes from Marylands LLP, as this is when their obligations started from.

Contact us

Assisting in helping organisations review their engagements with off-payroll workers, by producing detailed employment status reports which help minimise risk where the position is not clear.
Andy Hamman
Andy Hamman
Director, Employment Tax
London