IR35 rules explained
IR35 is simply the process of considering status (employment or self employment) and then in cases of employment status imposing a special tax liability.
Trying to explain the differences between employment and self employment can be difficult and is made all the more difficult because each industry and professional skill has different peculiarities associated to it.
For instance consultants undertaking roles that require special security clearance can not, for this reason alone, retain the same level of control as those without the need for clearance. This does not mean employment exists, but it requires a more specific understanding of working practices in such cases.
The law, its legislation and the legal cases and decisions that make up legal interpretation, is complex to understand. To make this easier we often use a practical example to communicate the tests that need to be applied, and for this we use the "bricklayer's story"
The bricklayer's story
You want to build a wall at the end of your garden, you have determined where that brick wall should be built, its height and the style of brick you would like to be used, possibly even the style of bricklaying.
However you can't build the wall yourself and so you have appointed a bricklayer to do the work. You have chosen the bricklayer by looking at work he has done in the past, interviewing him and you feel that he runs a business professionally (a business actually exists)
You are the client and the bricklayer is the contractor.
You agree a start date, a target completion date and a price to complete the job. You agree the specific terms that are appropriate to the building of the wall.
The project and the terms of the project have been defined.
You do not specifically instruct the bricklayer on when to start in the morning or when to end at night, you don't tell him how many bricks he has to lay or complain when he has a tea break. You do not control how hard he works.
You do not say how to mix the mortar, or how to physically lay the bricks.
You don't provide the cement mixer or the hand tools, but you do provide the water and you may possibly supply the actual bricks, sand and cement.
You do not control how many bricklayers are used or which bricklayers to use although you may influence who they are, especially if you don't like them, after all they will be working in your garden.
The bricklayer has independence on how, when and (subject to obvious constraints) where the work is done. He has control over his performance and the techniques that he uses. You respect his skills but within the boundaries of what you want him to do (i.e. the project). He has control over the amount of resources he allocates to the job, also within the boundaries of the project.
You provide some of the obvious means to complete the task (i.e. the land to build it on, access to the site, maybe tea and coffee) but by no means the resources required for doing so. The bricklayer is bringing to the project specific skills being something that you would not normally undertake yourself. (Control and Independence, provision of own tools)
The bricklayer possesses and provides the resources, specialist skills and equipment and knowledge necessary to complete the project, qualities that you do not possess. (Specialist skill and knowledge beyond that normally available)
If the bricklayer builds the wall in the wrong place he must knock it down and rebuild it in the right place and at his own cost. If he builds the wall and it falls down he must rebuild it, again at his own cost. If he builds the wall in the wrong style or dimensions he must correct his mistake, again at his own cost. The bricklayer ought to be insured for injury caused to you, your family or the general public as he would be liable for any such injury.
If the wall is built in a few days he makes more money than if he builds the wall over six months, and not only does he make less money but also runs the risk that you will impose financial penalties for late completion, perhaps not even paying at all.
If the project is incomplete final payment may not be made. If he completes the task and you can't afford to pay him he could financially lose out.
He has real commercial, personal and financial risk together with the ability to financially benefit from his own efficiency. (Risk)
When the bricklayer has completed the task, you have no obligation to provide further work and the bricklayer is not obliged to offer his services further. If it's raining and work can not proceed the bricklayer goes home and you don't have to pay him specifically for that day, the obligations between you are limited to only that in connection with the project.
There is no mutual obligation between you other than within the boundaries of the limited project. Indeed the level of obligation is too limited. (Mutuality of Obligation)
You would not complain if "Jim" turned up instead of "Jake", or if "Jim" turned up with "Jake". As your bricklayer can send anyone or if the person you expected was substituted for someone else, then clearly the agreement is not one for the bricklayers' own personal services it is instead for building the wall. Although you are entitled to feel happy with their ability to complete the tasks and can challenge such ability provided that the work is done properly and the bricklayer is assuming responsibility then you are content to allow the new person. (Substitution)
The bricklayer is clearly "self employed" and we have identified the following characteristics for self employment:
- A defined project
- Specific terms
- Independence and control
- The provision of the means to complete the task
- Commercial and financial risk with the potential to enhance commercial returns
- No mutuality of obligation
- A right of substitution
- The bricklayer has a clearly identifiable business activity
Compare the above with the position where you require a bricklayer on a day to day basis and that you have one person that you expect to turn up to work from 9am to 5pm, 5 days a week, with an hour for lunch to build whatever you direct from time to time. You have agreed an annual amount and are happy for him to take leave and pay him if he is unwell.
You have a workshop where you store a cement mixer and other tools acquired over time which he uses.
You pay the bricklayer a fixed hourly rate regardless of whether the work is good or bad. If you don't need any bricks laying, you can get him to do some gardening and he actually expects you to find him something useful to do when its raining.
The bricklayer would be employed by you; and this is often the fact in real life as you do not need to be a business to employ people (eg. Au Pairs or domestic workers such as cleaners or house keepers, gardeners are all potentially employed under PAYE by the householder).
