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 Off-payroll working rules and what may tip a service provision agreement into an employment relationship
Employment contracts

Off-payroll working rules and what may tip a service provision agreement into an employment relationship



What are the off-payroll working rules for clients, contractors, and their intermediaries?

IR35 concerns the prevention of tax avoidance, through the establishment of a test for whether a contractor is genuinely self-employed or is in fact a ‘disguised employee’.

Under IR35, a ‘disguised employee’ is a contractor who has been hired through the use of an intermediary, most commonly a personal service company, in circumstances where they would have ordinarily fulfilled the role of an  employee had these arrangements not been in place.

Being self-employed brings with various income tax and national insurance benefits. Being treated as employed brings with it compliance requirements for the employer, as regards income tax and national insurance.

Who works out the IR35 status?

Prior to 2021, contractors in the private sector determined their employment status for IR35 purposes.  This has now changed, aligning with the rules that applied to the public sector from 2017, and the business using the contractors (the ‘client’) is now responsible for determining IR35 status.

The client must exercise reasonable care when making this assessment, giving their reasons behind the decision in a document called the Status Determination Statement (SDS). Failure to do so will result in the worker’s tax and National Insurance contributions becoming the client’s responsibility.

When does IR35 have to be considered?

Firsly, you need an intermediary. If a contractor is using a personal service company, or another entity is put in place between the contractor and the service recipient, then the arrangement is potentially “within scope”.

When do the IR35 rules apply?

If an intermediary has been used and the arrangement is “within scope”, then the next step is to look at the substance of the relationship between the contractor and the client to determine whether or not the arrangement is ‘inside IR35’ or not.

• An annual turnover of more than £10.2m
• A balance sheet total of more than £5.1m
• More than 50 employees

HMRC will look at the reality of the arrangement and not just the written contract(s). HMRC provides a ‘Check Employment for Tax’ (CEST) tool to help assess whether a contract falls within IR35. HMRC states that it will stand by all determinations given by the tool, as long as the information submitted is and remains accurate.  However, where the CEST tool is unable to produce a result and the status cannot be determined through that, all the factors relevant will need to be considered.

If the arrangement is inside IR35 the fee-payer (who may be the client receiving the services or an employment business for example) is responsible for processing income tax and employee national insurance contributions (NICs) via PAYE and also for paying employer NICs and (if applicable) the apprenticeship levy.

A wrongful determination of the relationship can have significant consequences as is evidenced by a case decided under the old rules and where the intermediary was found  liable to pay income tax  and class 1 National Insurance contributions. In Christa Ackroyd Media Ltd v HMRC [2019], it was determined that Christa Ackroyd was an employee and her intermediary company was liable for tax and National Insurance of £419,151 for the tax years she worked for the BBC.

To minimise risk and avoid an HMRC investigation, IR35 must be considered by those procuring services through intermediaries when assessing service provision arrangements. As the IR35 legislation does not contain a definition of employment, the determination of whether an individual should be treated as an “employee” must be assessed by reference to multiple different factors.

What to look out for

As there is no statutory test, the judicial starting point is typically the judgment of McKenna J in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] (the “RMC case”) where he described the essential elements of a contract of employment:

“A contract of service exists if these three conditions are fulfilled.

  • The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.
  • He agrees, expressly or implicitly, that in performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.
  • The other provisions of the contract are consistent with its being a contract of service.”

Mutuality of obligation

The first condition pertains to the mutuality of obligation. This tests whether there is a binding obligation on the client/ employer to provide work and an obligation on the contractor/ individual to perform that work. If this element of the contract exists, it may indicate the presence of a contract of employment.

Self-employed individuals tend to work on shorter-length contracts on a project-by-project basis with breaks in between contracts. If a contractor contracts solely with one client over a longer period and it appears the client is obligated to provide continuous or replacement work, it is more difficult to argue that the individual is genuinely self-employed.


The second condition relates to how much control the client has over the contractor’s work. If the client determines what is to be done and how, when, and where it is done, then it points to a relationship of employment. Where a contractor retains control over timescales, locations and how they complete their services, it is more likely that the contract will be one of service.

Other relevant factors

If the criteria of mutuality or control for employment to be present are not met, then it points towards the relationship being one of service. However, if they are present this is not conclusive, a full assessment still needs to be made to establish whether an employment relationship exists.

In Hall (Inspector of Taxes) v Lorimer [1994], Mr Justice Mummery stated “this is not a mechanical exercise of running through items on a check-list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail”. In order to paint a full picture, a multifactorial test should be applied considering factors such as substitution, exclusivity, being “part and parcel” of the business, and financial risk.

  • Substitution

Substitution can be framed in two ways, as was observed by Briggs J in Weightwatchers & Ors v HMRC [2011] [32] to [34]. There is a distinction between the contractor being able to fulfil their obligation by arranging for another person to do the work on their behalf and a qualified right within the contract for another person to do the work if the contractor is unable to work. Where the contractor can send a substitute, and it is their responsibility to choose the individual, this will point towards the contract being one of service, not employment.

  • Exclusivity

Exclusivity clauses in the contract that prevent the contractor from undertaking work from any other clients would suggest a relationship of employment.

  • Part and parcel

A contractor may be viewed as “part and parcel” of the organisation and therefore an employee if they are fully integrated into the organisation. For example, the provision of uniform by the organisation, being involved in social events, how they introduce themselves, having a company email address and generally giving the impression that they are associated with the company all point towards employment.

  • Financial risk

As suggested by Cooke J in Market Investigations Ltd v Minister of Social Security [1969], ‘what degree of financial risk he takes’ suggests whether an individual is performing the services as a person in business on their own account, or as an employee. If one carries their own professional indemnity insurance, takes a financial risk when entering into the contract and there are clauses stating they have a contractual obligation to remedy any errors in their own time, this would point towards the contract being one of service, rather than employment.

  • Relevant circumstances

During the enquiry, HMRC will consider the contract(s) that govern the relationship between the worker and the client. It’s important to consider the actual working relationship, rather than just what’s written in the contract.


There are a multitude of factors that may tip a service provision agreement into an employment relationship. The rules for assessing employment status from a tax perspective are complex and several different aspects are required to make a determination. It is therefore essential that businesses properly assess their service relationships and ensure contracts (and the reality of the arrangements) provide them with proper protection, as a failure to do this correctly may result in significant financial consequences.


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