How do clients assess IR35 status?
There isn’t one single method of determining whether an engagement is inside IR35 or not. The off-payroll working rules (the ones that make clients responsible for deciding if IR35 applies) only say that clients must take “reasonable care” when assessing the status of a worker.
In practice, this typically involves methods such as:
- Using HMRC’s ‘Check Employment Status for Tax’ (CEST) online tool
- Engaging a specialist consultancy or legal expert to conduct an assessment
- Using software or digital questionnaires provided by a specialist consultancy or legal expert
- Conducting the assessment in-house without using software or tools
Advertising the role as ‘inside IR35’ – also known as a ‘role based determination’
What is CEST?
To help clients to make determinations, the government hosts a free-to-use tool named ‘Check Employment Status for Tax’ (CEST). CEST asks a series of questions and generates a status decision based on the answers provided.
While CEST primarily exists for clients, it can be used by anyone, including contractors. It’s entirely anonymous – you don’t have to put your name or company name into it, and HMRC keep no record of it. If you use it and it provides you with a result which says ‘IR35 does not apply’, keep it and share it with your client – it may help them get their own assessment right.
What does 'inside IR35' mean?
Being ‘inside IR35’ means that a freelancer or worker is a ‘deemed employee’ for tax purposes. However, this doesn’t mean that they become directly employed by the business they are working for.
Instead, the worker may be asked to join another payroll – this could be an agency payroll if an agency is involved in the work placement, or an umbrella company payroll.
For IR35 to apply, it must be determined that the relationship between a freelancer and their client is one ‘of service’ rather than ‘for services’. These terms are used in case law. A contract ‘of service’ is akin to an employment; a contract ‘for services’ indicates a genuine freelance engagement. The distinction is made by referring to a number of ‘tests’, which, are established in case law.
Do I get employment rights when working inside IR35?
If your contract is ‘inside IR35’, it means you are employed for tax purposes. However, this doesn’t automatically mean you are employed for the purposes of employment rights.
This is because employment rights are upheld by employers. But as contractor working inside IR35, you’ll rarely be directly employed by the client you’re working for.
Instead, you may be asked to work via an umbrella company and will sign an employment contract with them before work begins. So, the umbrella company is your employer – not your end client.
Employees get minimum levels of pay, rest breaks and holiday. Employees are also entitled to statutory maternity and paternity leave.
After two years of continuous employment, employees also qualify for statutory redundancy pay, stronger dismissal protections and more – more on this on gov.uk.
So I get employment rights from my umbrella company?
As an employee of an umbrella company, you are entitled to employment rights and protections.
However, employment by an umbrella company is unlike traditional forms of employment, and the protections you receive do not apply to the organisation you are actually working for – your client. This makes accessing employment rights less clear when working through an umbrella company.
For example, some contractors have experienced complications in receiving holiday pay, finding that funds originally intended to cover the cost of accrued holiday entitlement have ‘timed out’ and are retained by the umbrella company.
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