Are you Safe from the IR35 Regulations

From 6 April 2013 it should be noted that these regulations have been extended to automatically   include circumstances where the service provider is appointed as an officer (e.g. director) of the    end user.  In this article we consider the original IR35 regulations and draw your attention to decisions of The Courts over recent years which have clarified when these regulations may or    may not apply.

In principle the IR35 regulations need to be considered if an individual provides services (either   intellectual or manual) via   their own limited company to third parties (possibly but not necessarily   via an agency).  The IR35 regulations, which basically impose a requirement to pay out company   income as remuneration subject to PAYE/NI and prevent companies distributing profits tax efficiently via   dividends, apply where the relationship between the individual director/shareholder and the ultimate recipient of that director/shareholder’s services would be an employment relationship if the intermediary company and (if appropriate) agency were ignored.

The case involving Dragonfly Consulting Limited ultimately decided in favour of HMRC in The High Court (and therefore of some considerable authority) was, as with all IR35 cases, concerned about establishing whether the employment relationship existed in that particular case.  The decision indicates that the following issues are likely to be helpful in ascertaining the position but are not decisive:-

  • The intention of the parties.
  • Training arrangements for the contractor.
  • Provision of small items of equipment by the contractor.
  • Sick pay and holiday arrangements.
  • Attendance of the contractor at social functions.
  • Payment by the contractor of minor expenses.

The more important and therefore key issues were as follows:-


This is not in connection with the detailed way in which the contractor undertakes his/her duties which are often highly skilled operations not readily susceptible to detailed control.  What needs to be considered, according to the Dragonfly decision, is whether the ultimate end user of the contractor’s services can determine in general terms the work to be done, the project to be worked upon and the order in which work is to be done.  If such control can be exercised then there is likely to be an employment relationship existing and the IR35 regulations, would consequently apply.  If the contractor is left to work independently more or less as he/she sees fit then there is likely to be a self employment relationship and the IR35 regulations would not apply.


The key question is whether the contractor has to provide his/her services personally or whether he/she is entitled to send a substitute of his/her choosing to undertake the services in question.  If the ability to send a substitute is genuine and indeed ideally if a substitute has been used then it is almost impossible for an employment relationship to exist and consequently very difficult for HM Revenue to impose the IR35 regulations.


  1. If there is a general expectation that ignoring holidays, non work days and sickness, etc the contractor will turn up to provide his/her services and;
  2. The contractor having turned up will be paid whether or not any actual work is available or indeed in the short term whether the contractor undertakes any work at all, then there is likely to be an employment relationship and the IR 35 regulations will apply.

Of lesser importance but still worthy of consideration is HM Revenue and Customs guidance which indicates that, for any relationship to be regarded as one of self employment, it would be expected that a “yes” answer would be given to the following questions:-

  • Do you risk your own money?
  • Do you provide the main items of equipment (not the tools that many employees provide themselves) needed to do the job?
  • Do you regularly work for a number of different people and require a business set up to do so?
  • Do you have to correct unsatisfactory work in your own time and at your own expense?

Other relevant factors which should be considered in conjunction with the key factors of control, substitution and obligations plus the HM Revenue guidance as detailed above are often as follows:-

  • Payment arrangements, i.e. by project (indicating self employment) or hourly rate (indicating employment although the 2012 Tribunal decision in Primary Path Limited stated that, for professional services, hourly pay was to be more or less expected for both employed and self employed individuals).
  • Ability to increase profitability as a result of the contractor’s efforts (other than by simply working longer hours) which, if present, would indicate self employment.
  • As well as the option to hire someone else to undertake the work, the ability to engage others to assist at the contractors own expense which, if present, would indicate self employment.
  • Whether matters such as where services are provided, when services are provided and how services are provided are in the hands of the contractor (indicating self employment) or the engager (indicating employment).  Also whether the type of service provided is commonly undertaken by a self employed individual (most likely to be professional services) or by an employed individual (most likely to be the case in respect of shop floor workers or those in administration).
  • Contracts with more than one organisation at the same time (indicating self employment) or just one contract at any one time (indicating employment).
  • The contractor providing his/her services broadly by reference to standard hours (indicating employment) or at times to suit the contractor (indicating self employment).
  • The undertaking of services at premises other than those of the end user or the home of the service provider and/or the holding of a professional indemnity insurance policy both  or either of which, if present, would indicate self-employment.

Where the contractor is paid on an hourly basis, providing his/her services to only one organisation at a time by reference to standard working hours with little or no opportunity to influence the financial return generated (other than by working longer hours), the IR 35 regulations are likely to apply.  This will particularly be the case where the contractor is not realistically entitled to send a substitute, is subject to overriding control by the end user and expects to provide his/her services week in/week out and be more or less guaranteed payment at an hourly rate for hours worked.

Each case must be considered on its own merits bearing in mind all the relevant circumstances and some cases will certainly be very borderline.  Each case must also be considered in the context of the actual circumstances rather than the theoretical terms which may be recorded in any written contracts.

Please contact us if you require any further information or advice.