What makes a good IR35 assessment?

When it comes to determining whether an assignment is ‘inside’ or ‘outside’ IR35, you must consider both the working practices and the contracts throughout the supply chain to ensure you’re passing on accurate assessments to workers.

Following the introduction of the IR35 reforms in April 2021, it is now the end client’s responsibility to determine a contractor’s employment status and pass this down to the recruitment business and worker accurately. As a recruitment organisation, you must understand what makes a good assessment and how to identify if the status determination statements (SDSs) you receive are accurate to protect yourself from any financial risk or challenge from HMRC. Plus, having an understanding of your client’s responsibilities ensures you’re best placed to advise them going forward and highlights your dedication to best-in-class service.

What is an SDS?

An SDS is a formal document that outlines a contractor’s IR35 status and the rationale that was used for that assessment.

There are three points at which an assessment should be undertaken to produce an SDS:

1)  In-role assessment – this is an assessment that can be undertaken when a contractor is in place
2)  Role assessment – this is an assessment that can be undertaken to determine the likely, or ‘indicative’ status of a role before a contractor has been appointed
3)  Role re-assessment – this is the re-assessment of an assessed role to check that actual working practices reflect the assigned status.

The SDS must state if the worker would be an employee or officeholder for tax and National Insurance purposes if directly engaged. It must outline the reasons for that decision and the end hirer must be able to prove they have taken “reasonable care” in arriving at the conclusion.

To determine if an assignment is ‘inside’ or ‘outside’ IR35, it is necessary to examine both the contracts in the supply chain and the actual working practices.

What does status determination entail?

For every assessment an end hirer carries out, they must be able to prove that they have taken “reasonable care” and have looked at all the important considerations, including:

Mutuality of Obligation – are the end hirer and contractor obligated to one another on an ongoing basis?

An employer and employee are obligated to each other. You must prove if this is/isn’t the case in the scenario you’re assessing. For example, if the end hirer is obliged to continue to offer work on an ongoing basis, and the worker is obliged to accept it, that looks like employment or an ‘inside’ IR35 situation.

Another indication would be a worker getting paid even if no work was available on a given day. If there are not these obligations on both sides, then there is not sufficient mutuality of obligation to show employment.

Right to Substitution – can the contractor substitute themselves for a suitably qualified and experienced replacement?

The end hirer can make only reasonable demands regarding a substitute, such as a particular trade credential or level of experience. If a contractor can substitute for a role, then the assignment is more likely to be considered ‘outside’ IR35.

Importantly, this isn’t the same as your recruitment business making a substitution – the contractor/their PSC should be making the substitution happen. The original PSC would also process payment to the substitute/the substitute’s PSC.

Control – can the end hirer control how, when, and where the contractor works?

Sometimes, due to operational constraints or security concerns, work can only be carried out in a certain environment or at certain times. If there is no operational reason for a particular location or timing, then the contractor should have control over how they deliver their output and when and where they do the work. If they have to comply with requirements from an end client (which are not based on operational necessity) then they are working more like an employee or ‘inside’ RI35.

Financial Risk – can the contractor suffer financial loss in the event of unsatisfactory or late delivery of a project?

If the worker/their PSC could suffer a financial loss then that would be an indicator that they are not ‘inside’ IR35 – they are working like any other business, not an employee.

Do they need insurance? – if not, why not. Most businesses do need insurance. If work is not completed satisfactorily, will they have to put it right without charging or being paid for those corrections? Self-employed people can make a loss if they quote badly or a job goes wrong. They are also able to make more of a profit if they complete work ahead of schedule. Is that true in the role you’re assessing?

Behaviour – does the contractor behave like an employee? Are they on the holiday rota or in the employee performance management system?

If the worker behaves like an employee, for example, if they’re on the holiday rota, in the employee management system, or use a lot of end-user equipment, then they could be considered more likely to be ‘inside’ IR35.

A good status determination statement must:

• Confirm if the assignment is considered ‘inside’ or ‘outside’ the scope of the legislation
• Say if the worker would be an employee or not if they were directly engaged with the end hirer (without their PSC)
• State the reasons for the decision – such as the ability to substitute, the level of control in place, and the amount of mutuality of obligation present in the relationship
• Be sent to the next party in the supply chain (usually from the end hirer to the recruitment business) and the worker/their PSC.
• Be made using reasonable care.

 

In addition to the contractor’s working practices, it is vital to consider the contracts in the supply chain when determining a contractor’s IR35 status because these can have a big influence on the assessment outcome.

The impact of appropriate contracts

Ensuring that the IR35 status of an assignment is consistent when considering both the working practices and the contractual agreements between the PSC and the client is essential. If there are inconsistencies between the contract and the working practices, depending on the circumstances, this could open your recruitment business and the end client up to financial risk.

For genuinely ‘outside’ IR35 contractors:
Where a review of working practices is undertaken and indicates that a worker is providing services to a client in a genuinely ‘self-employed’ (‘outside’ IR35) capacity, the contracts in the supply chain must be consistent with these working practices.

For example, where a review of working practices confirms that the degree of control exercised over a worker is inconsistent with an employment relationship (i.e. the engagement is ‘outside’ IR35), but an inappropriate contract exists in the contractual supply chain which provides a degree of control which is strong over the worker, then the contract alone may increase the risk of bringing the engagement within IR35, even though working practices indicate otherwise.

Therefore, it is important, when assessing IR35 status, to consider the contracts for any engagements where a review of working practices indicates an ‘outside’ IR35 status. Identifying these inconsistencies will allow you time to amend any contractual terms where necessary, to ensure you can keep engaging with contractors on an ‘outside’ basis and minimise your financial risk.

For ‘inside’ IR35 contractors:
Where a review of working practices indicates that a worker is providing services to a client which are more consistent with an employment relationship (i.e. ‘inside’ IR35), the situation is slightly different.

In this scenario, a review of contracts throughout the supply chain would not be required for ensuring consistency with working practices. However, it may be necessary for you and your clients to review contracts in the chain for other commercial reasons, such as amendments to charge rates for ‘inside’ engagements or perhaps to review the warranties and indemnities detailed within them.

How we can help

We can help you conduct compliant assessments, review contracts, and communicate strategically and effectively with all parties in the supply chain to mitigate risk for everyone. To find out more about how we can help your staffing organisation with IR35, please click here to view our market-leading IR35 assessment tool, IR35 Complete™ and learn more about our complete suite of compliance solutions.