IR35: what’s in a determination? 

IR35 determinations are the linchpin when it comes to managing the risks surrounding the IR35 off-payroll working legislation. Ensuring colleagues who make Status Determination Statements have a robust understanding of IR35 principles and adequate information about the worker’s standard practices, is essential to demonstrate reasonable care has been taken to make accurate determinations. 

In our latest blog we take a more detailed look into status determinations. 

What is an IR35 determination? 

In short, it’s the process organisations are required to go through to determine the tax status of workers who are engaged through a Personal Service Company (PSC). 

HMRC first introduced the need to perform IR35 determination checks on off-payroll workers in the public sector, before extending the legislation to the private sector. Its purpose many agree was to manage tax avoidance practices and make clear differentiations between those workers who are operating independently as an external PSC worker. As opposed to those who are operating too similarly to directly engaged permanent workers. The biggest difference between them is how HMRC collect tax on their earnings. 

What is a determination status? 

The determination status, derived through a Status Determination Statement (SDS), is the document that details each worker’s employment status for their assignment. An SDS should detail one of two outcomes: in scope of IR35 or out of scope. 

In scope means that IR35 does apply to the worker’s assignment, so tax and National Insurance Contributions need to be deducted from their earnings, known as Deemed Payment. Out of scope on the other hand indicates that the worker is operating outside of the off-payroll working legislation, so IR35 does not apply, and they are responsible for meeting their tax implications through their Personal Service Company. 

Who is responsible for IR35 determinations? 

The End Client is responsible for making the IR35 determination, by issuing an SDS to all parties involved in the contingent worker’s engagement. 

For organisations who partner with recruitment agencies to supply contingent workers, it’s critical that IR35 determinations are still made by the End Client, the company which the worker is delivering the work to. Whilst agencies might be able to help share insight into working practices, businesses need transparent processes in place to demonstrate that reasonable care has been taking to ensure the accuracy of status determinations, which may need to be evidenced should HMRC wish to open an investigation. 

The End Client should have a formal disagreement process in place, should the worker or any stakeholders in their engagement chain wish to challenge the determination. Companies have 45 days to respond to the dispute, detailing their reasoning behind the outcome. The original status must remain in place during the investigation period, and if the review determines a different outcome and new SDS must be created and shared with all parties. 

Is there an IR35 determination calculator? 

HMRC developed a digital tool, Check Employment Status For Tax (CEST), which is free for organisations to use to make status determinations. Users answer a series of questions around how the worker is engaged, before the tool outputs it’s determination: in scope, out of scope or unable to determine. Where the tool is unable to determine a clear IR35 status, further review of working practices will be required to identify areas that may be unclear. 

Other tools are available in the market and HMRC do not mandate the use of CEST, however they say they will stand by its outcomes provided the tool has been used correctly and honestly. 

What are the three key tests for IR35? 

Tools like CEST assess a range of areas to determine whether HMRC believe IR35 applies to the worker, including three key areas. 

Substitution 

The concept refers to the structure and nature of a working relationship between an off-payroll worker and their End Client. The right to substitution is one of the key tests in determining an IR35 status. It refers to whether a PSC worker has the genuine right to send someone else to do their work in their place. If the worker is free to provide a substitute with similar skills and technical knowledge, and the client would accept this without restriction, it indicates a level of independence typical of self-employment. Alternatively, if the client requires the contractor to personally carry out the work, this may point towards an employment relationship – potentially bringing the engagement inside IR35. Right to substitution helps determine whether the worker is genuinely self-employed or effectively operating as an employee in disguise, a practice known as Disguised Employment. 

Control 

Control is a fundamental test in determining whether the PSC worker falls inside or outside IR35. It looks at how much direction the client has over what work is done, how it’s done, and when or where it’s carried out. If the client exercises a high level of control and supervision, like they would an employee, it suggests the worker is not truly independent. Genuine PSC workers typically have autonomy over their work, which can help support an outside IR35 status. Therefore, assessing control is crucial in identifying the true nature of the working relationship. 

Mutuality of obligation 

Mutuality of obligation (often referred to as MOO) is another key factor in determining the IR35 status of an off-payroll worker. It refers to whether the client is obliged to offer work and whether the worker is obliged to accept it. In a typical employment relationship, there is an ongoing expectation of work and payment. However, a genuine contractor relationship should lack this mutual obligation – work is agreed on a project-by-project basis, with no guarantee of future engagement from both parties. Crucially as well, the worker should not feel they are obligated to accept additional work the client requests. The presence or absence of MOO helps distinguish between employment and self-employment, making it a crucial part of any IR35 assessment. 

What are the red flags for iR35? 

Fundamentally, HMRC’s legislation is designed to identify those workers who are acting in the same way as an employee of the business but work through their own PSC and as such do not pay tax and National Insurance Contributions in the same way as Pay As You Earn employees do. 

As a business it’s crucial that the engagement terms of your off-payroll workers, and their working practices have clear differentiation between how employees and PSC workers are engaged. 

Income reliance from one client 

Red flags can include workers who obtain a large percentage of their income from one client, potentially indicating that there is an agreement, whether that be formal or informal, that they will be secured to work back-to-back on projects. Whilst this might be due to the specialist services the worker provides and not because there is mutuality of obligation, none the less it’s important to have clear processes in place for repeat assignments, and an individual SDS for each. 

Part and parcel 

Part and parcel is a key measure for HMRC’s determination of IR35 status, where it looks for evidence that the PSC worker has become integrated into the business. Factor such as whether they have their own desk, security pass and access to subsidised canteen facilities need to be considered. Together with indicators such as the worker using a company email address or being asked to manage directly engaged permanent staff. Access levels to areas of the building or computer databases also needs to be considered, would a company grant permission for external parties to access confidential information without supervision? 

Financial Risk 

How much risk financially the worker takes on may be a red flag, in particular where they carry very little risk. If they are providing their skills to the company through their PSC company, this should indicate a contract of service not employment. As such it’s expected that the PSC company will carry some financial risk, such as being paid a fixed price for the work they deliver – regardless of how long it takes them. If it takes them longer to complete the work, this would not automatically allow them to bill the client more. Similarly, in stances where the work standard is not adequate, the PSC company would typically be expected to rectify this at their own cost, indicating the financial risk they have taken on. 

How long does an IR35 status determination last? 

The expiry length of an IR35 status determination can be a grey area. Whilst it is intended for the length of the engagement, longer assignments may require additional scrutiny. 

The SDS provides a snapshot of what the engagement looks like ahead of the assignment starting. Once the contingent worker commences, working practices may defer to those expected, even where the assessment has been made in good faith. Another factor that may indicate that further review is needed, is when the remit of the worker changes in line with the needs of the project. That’s not unusual, but it will require a new SDS to be created where there are material changes to how the worker is engaged. 

It’s also best practice to reissue Status Determination Statements when assignments have been active for 12 months or more. Undertaking reassessments ensure that key measures such as part and parcel haven’t become difficult to clearly evaluate over time. Where the new SDS indicates a change in their determination, this needs to be passed to the worker and down the chain of engagement. 

For organisations who engage hundreds of off-payroll workers this need to reevaluate status determinations can be highly administrative and time-consuming. That’s why Linx’s IR35 team works with clients to manage this process on their behalf, ensuring the correct checks and measures are in place to provide them with meaningful insight to make informed changes and future decisions around IR35. 

How can businesses ensure their status determinations are robust? 

We’d always recommend partnering with an external consultancy to provide independent and impartial oversight into your IR35 processes, including how you perform status determinations. 

This includes reviewing the staff training your business provides, to ensure those involved in making status determinations have the right level of knowledge about IR35. How IR35 is managed within your recruitment supply chain is also a key area of concern for our experienced team, who’ll work with you to develop tailored supply chain audits if needed to actively manage the risk of non-compliance.