Another judgement has been handed down that looks like it will further clarify the eternally vexed question of when is an employee not an employee. In the case of Autoclenz vs Belcher, it has been conclusively proven that, despite the contractual terms in place, a group of workers were de facto employees since they failed the key tests for non-employment and were in fact providing their services personally.

The real trick in this case is not that the workers were employees per se, but that the actual working conditions of their engagement, the rules under which they worked and the level of freedom they had in how that work was done contradicted the contractual terms in some key areas. Hence, they are employed.

Furthermore they failed to satisfy the judge in the Appeals Tribunal that they were in business on their own account, which, as we have seen, is now the real key test for both the AWR and IR35. And that is important.

This whole issue of “are you in business” is gaining greater importance and is beginning to rank alongside the triumvirate of Substitution, Direction and Mutuality, which, as any fool knows, are how you decide if you are IR35 caught.

Clearly it is not a revelation that these conditions have to exist in fact as well as in the contract; we got that one sorted in the Dragonfly case, which upheld the arguably self-evident case that the contract has to reflect reality and if it doesn’t it will be ignored in favour of a hypothetical one describing that reality.

So from our side – that of the genuine freelance contractor – this has merely clarified what we already knew and doesn’t actually take the IR35 argument a lot further forward. For the clients though, this presents something of a headache, especially when taking on us real contractors. They may have to consider doing something I’ve been on about for a long time now, use B2B contracts that treat me as a supplier of expertise, not as a temporary employee. That, in turn, greatly reinforces my status as being a genuine business. And that puts me neatly outside IR35 and the AWR without any further discussion needed.

Although I’m not holding my breath for that to happen.

Still, this goes back to the original IR35 legislation, which contains a thumping great non sequitur at its very heart. The question it asks is “Would you be an employee if you were an employee and not working through your own company?”. Well yes, I probably would, but that situation doesn’t in fact exist. It also goes on later to talk about how you treat two contracts, one caught and one not-caught. If you have a not-caught contract, then you’re in business, almost by definition. So how can you possibly also have a caught contract? Confusing, isn’t it? Let’s hope the IR35 Forum has the wit and wisdom to get this whole area sorted out for once and all and we can put HMRC back in their box.

Ah yes, HMRC. You may recall my little contretemps from last week, about them losing a CT payment. I got another reminder last Friday, with even more interest added, so I phoned them up, more in anger than hope, it being close to seven o’clock in the evening. And astonishingly I got to speak to someone. What is more, they identified what had gone wrong – their idiot system had seen two payments and assumed that they must belong to different tax years – and was able to sort it out there and then. So well done them. For once.

Except they still owe me some overpaid PAYE and have done for quite a while now. I suppose I could always try phoning them again….

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This is not and does not claim to be a definitive guide to IR35 and how to avoid its clutches. That is something that has defeated many experts over the last ten years. However, I hope to provide a summary of what we do know about IR35, what all the arcane acronyms really mean, and which bits are the important ones.

There is a lot of detailed discussion out there; too much to be easily read these days. Much of it has been written by people with their own agenda which is why some advice seems to conflict with other versions. So I thought a simple and pragmatic overview from an informed freelancer’s side is probably overdue.

What is IR35?

IR35, or the ”Intermediaries Legislation” as it is more properly called, was announced in the Budget of 1999 and came into force in April 2000. Its aim was to stop people using dividend payments instead of salary in order avoid paying a large percentage of their National Insurance contributions. It didn’t try to make that practice illegal, since that would be rather difficult, but it attempted to define a set of conditions that would make you pay those “missing” NI contributions.

Its real genius was to fail to define what those conditions are. Instead it said that if you look like an employee, you will pay tax as an employee on all your earnings, except we’ll give you 5% to cover your working costs since you are not an employee. You can see why there might be a degree of confusion.

The definition of an employee has been set by case law over many years. At its simplest, it comes down to three key concepts: Direction and Control, Mutuality of Obligation and Right of Substitution. Each needs to be defined in the contract and, obviously, the contract has to match reality pretty closely if it is to stand up in court.

Direction & Control

Direction and Control means that the client can tell you what to do. If however, he can tell you to do things that are not directly relevant to delivering what it is you are there to do, then that is excessive. A quick check is “Do the permanent staff have to do this to do the job?” If they do, then fine, if not it is excessive. This needs to be managed with a degree of care and sympathy, of course: no point staying outside the client’s rules on hours of work and then simply not turning up because you fancy a day off. Equally, most freelancers are given an objective, a set of quality constraints and a time scale; those are not Direction and Control, since you are free to deliver the objective in the best way you see fit.

Mutuality of Obligation

Mutuality is a bit complex but at its simplest, does the client have to offer you work, do you have to accept it if offered, and can you charge when there is no work to do. There will be an irreducible minimum of Mutuality in any contract, but for our purposes the simple maxim of “No work, no pay” will work as the basic key test.

Right of Substitution

Right of Substitution is fairly clear cut: can you send someone else to do the work. Employees can’t do that, so if you can, you are not an employee. However, the client has to have some say in the matter. The usual formula is along the lines of “you may send a substitute subject to the approval of the client, such approval not to be unreasonably withheld”.

Any one of the above should be enough to take you outside IR35, but the ideal would be all three. And let’s be clear, the above three conditions genuinely have to exist in reality as well as in the contract. A case (Dragonfly) was lost recently in part because the client denied they would ever accept a substitute for the worker, despite there being a clear clause in the contract that substitution was possible (a clause that was added some time after the engagement began, incidentally).

There are some other myths around IR35 that may be worth noting. Using your own kit is good, but if you have to use the client’s kit, it’s not that much of an issue. Having to work on site is not an issue if you have to be able to interact with other workers to do the job (although exactly when you are on site is up to you, as we have said earlier). Having multiple contracts is not a defence, since IR35 is applied on a per contract basis. Multiple clients may show you are genuinely in business but that seems not to be a major criterion in determining IR35 status despite, it being said very clearly that people in business on their own account would be outside the rules (Dawn Primarola, Paymaster General in 2000, is on record as having said precisely that).

Incidentally, Umbrella users are not and cannot be subject to IR35. They are employees in law and pay employee’s taxes (as well as employer’s taxes, come to that) so are out of scope.
The real trick is to think like an independent business, not as a temporary employee of the client. If you look at the engagement on those terms, much of the distinction between inside and outside IR35 becomes, if not clear, at least a little clearer.

IR35 Investigations

Finally, if you lose an IR35 case it does not currently mean that you are therefore an employee. The tests they use to determine status are the same but it’s only about taxation, not rights of employment. One day someone may press the nuclear button and claim employee rights because IR35 says they are one, but that hasn’t happened yet.

Losing a case means all relevant tax declarations, personal and corporate, will need to be recalculated and the balances paid over, with interest. As long as you have tried to determine your IR35 status, penalties will not be applied: that is about the only good thing about the whole sorry mess.

And to close, let me offer the comforting thought that the vast majority – well over 98% – of IR35 cases challenged in court to date have found in favour of the freelance being outside.

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