As Accountants looking after a number of Freelancers working through their own Limited Company (i.e. one-person service companies), we’re often asked to look at clients’ contracts from an IR35 perspective (i.e. when ignoring the intermediaries such as the worker’s own limited company, is the worker an employee of the end client?). There is no comprehensive legislative definition on whether a worker operates under a contract of services (employed) or a contract for services (self-employed). Employment status tests have instead been built up over the years via the outcome and content of cases going through the courts. The three main areas that the courts look at from an employment status point of view are ‘Personal Service’, ‘Mutuality of Obligations’ and ‘Control’ and historically all three aspects need to be in place for the worker to be an employee (so if one aspect is missing entirely then the worker should be self-employed).
1. Personal Service – is the worker obliged to offer his own work and skill to the end client? If, for example, there is an unfettered right for a substitute to be used then the worker shouldn’t be an employee.
2. Mutuality of Obligations – is there an ongoing obligation to offer/accept work by the end-client/worker respectively (normally in respect of both future services and the current contract)?
3. Control – is the manner/method in which work is done controlled by the end client?
If the answer to all three questions is in the affirmative then IR35 is likely to apply.
What happens in practice (i.e. the reality of the relationship) is also crucial – so even if per the contract the end client did not have the right to control the method of work but was doing so in practice then the ‘control’ factor could exist.
There is also a free online IR35 test by one of the leading websites for Freelancers/Contractors that one can take to provide feedback on IR35.
The above is for general guidance only. Always take professional advice on your specific circumstances before taking action.
Note: Lions Accountants Ltd provide specialist tax & accounts services for Freelancers with value-for-money fixed annual fees and are headed by a Chartered Tax Adviser who attended the inaugural PCG Freelancers Accredited Accountant course. Freelancer limited companies, usually with a single knowledge worker at the core, operate differently from most regular small businesses and are subject to special legislation like IR35 and many Accountants lack the right expertise to advise fully. Lions Accountants’ owners have provided specialist advice and services to Freelance Consultants (who operate via their own Limited Company) since the early 1990s. Our services ensure that the compliance requirements for freelancers are dealt with efficiently and cost-effectively. Specialist pro-active advice is also provided, all within our fixed fee arrangement. Our specialist services include employment status (e.g. IR35) issues and dividend planning (e.g. settlement legislation including Arctic Systems tax case).