Substitution, Direction and Control , Right of Substitution and Mutuality of Obligation are the principal referenced tests. When determining whether a worker is genuinely self-employed or a “disguised employee”, these key employment tests should be applied.
Relevant IR35 Tests
Employment status tests have not been codified (although HMRC now have the Check Employment Status for Tax (CEST)), however there is no comprehensive checklist that can be considered in order to determine whether or not someone is a true independent contractor. Employment status tests which have been established in decades of case law must be understood and applied.
o Can you provide a substitute?
o Are you subject to the end hirers control?
o Is there a mutuality of obligations between you and your end hirer?
o Do you bear any financial risk?
o Do you invest in your own business?
o Do you provide your own equipment and training?
o Do you receive holiday/sick/maternity pay from your end hirer?
What is Right of Substitution?
The contract by which the contractor provides their services, via their PSC, should not place any obligation on the contractor to provide a personal service to the end hirer, as personal service is a strong indicator of employment. There has been case law which demonstrates, where a contractor has exercised their right of substitution in practice, they are clearly not providing a personal service and are therefore operating outside of IR35. Many contracts by which contractors provide their services will include a “right of substitution” clause; however, the courts will usually look behind that and examine whether a true right of substitution exists or whether the right of substitution clause has been included to give the impression that a substitute can be provided, when in practice that would never happen.
What is Control?
Independent contractors should have a high degree of expertise and knowledge. Therefore, generally speaking, they should not be subject to a great deal of control in terms of how the services are provided. There are various limbs to “control”, namely, how, where and when the work is to be carried out. However, “control” should not be confused with monitoring the progress or quality of the work being undertaken, as the latter is a reasonable approach adopted by end hirers in order to ensure the services are progressing according to the overall project plan.
What is Mutuality of Obligation?
If the end hirer is obliged to provide the contractor with work to carry out on an ongoing basis and the contractor has an obligation to carry out that work, it can show that there is a “Mutuality of Obligation” between the parties.
In order to rebut this presumption, the contractor should be engaged for a specific project/assignment. Once the project/assignment has ended or been completed, there should be no expectation on the end hirer to offer any additional work to the contractor, or if it does offer additional work, there should be no obligation on the contractor to accept it.
Mutuality of obligation has sometimes been found to exist where workers have been required to work a fixed number of hours for an end hirer, although where there is flexibility in when and how those hours can be worked this has been found to be of less relevance.
Furthermore, the end hirer should not request the contractor to perform tasks outside the terms of the assignment. If the contractor was to carry out such tasks without the terms of the engagement being revised, it could be indicative of employment.