IR35 is a set of rules that apply to contractors who provide services to a client through an intermediary (often a personal service company, or PSC), but who would be classed as employees if they were contracted directly. The rules operate to ensure these individuals pay the same income tax and National Insurance contributions as employees.
In order to establish whether the IR35 rules should be applied, the court will need to consider the employment status of the individual concerned. It is important to highlight that in the context of employment status for tax purposes, an individual will either be employed or self-employed. Unlike where employment status is considered in the context of employment rights cases (such as holiday pay claims), there is no hybrid 'worker' status that can be applied here. It is also possible for somebody to be classed as self-employed for tax purposes even if they have a different status in employment law. To assist organisations with determining the tax status of an individual, HMRC has developed a Check Employment Status for Tax tool.
The Court of Appeal recently handed down decisions in two cases relating to IR35:
In both cases, HMRC thought the IR35 rules should apply. It thought there was an employment relationship in place in both cases.
Were the Contracts Consistent with Employment?
Both cases made their way up through the First Tier and Upper Tribunals. In Atholl House, HMRC was appealing against the decision of the Upper Tribunal that the contract was not consistent with employment. The Court of Appeal allowed the appeal and the case has been remitted to the Upper Tribunal. In Kickabout, the Court of Appeal upheld the Upper Tribunal's decision that there was a contract of employment.
The Court of Appeal confirmed the correct approach to IR35 cases is to:
In order to analyse the hypothetical contract, the court must consider the following three questions:
Importantly, the Court of Appeal has confirmed that finding there is mutuality of obligation and control does not create a presumption that a contract of employment exists. The court must consider all relevant factors before reaching a conclusion.
These two decisions emphasise the importance of considering all relevant factors in order to ascertain whether an employment relationship exists between two parties. It is not sufficient to consider mutuality of obligation and control alone. In future, IR35 cases are likely to focus more on the third element of the test, ie whether there are any other factors present which are inconsistent with an employment relationship.