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Inside or outside IR35

What is the difference between inside and outside IR35?

The IR35 legislation unquestionably complicates the lives of independent workers and it has impacted businesses that regularly use contractors.

A contractor caught inside IR35 is meant to pay the same tax an employee would but enjoys no benefits an employee gets.

It is therefore no surprise contractors spend a considerable effort hunting for roles outside IR35 which, however, means they have to ensure their status meets the criteria of staying firmly outside the legislation.

Employee vs contractor study

A recent case study review by Kennedys isn’t, strictly speaking, about uncovering the difference between inside and outside IR35 but it shows what it takes to be determined as a true independent contractor.

In the case of Mr Franco, a Deliveroo driver, the claim was to demonstrate that he was a de facto employee who was unfairly dismissed by his employer. Mr Franco won his case at first but lost on appeal.

In reality Deliveroo had some control over Mr Franco’s performance. Mr Franco dressed and acted as part of Deliveroo, and provided personal service on behalf of the business.

Interestingly, despite wearing a uniform, acting on the business’s behalf and adhering to certain quality standards, Mr Franco contractual relationship with Deliveroo bore more weight in the final decision.

The key arguments in overturning the original decision were:

  1. Mr Franco conducted his own business in "arranging" to provide the delivery services to Deliveroo;
  2. Mr Franco was not required to personally perform the delivery services, but could arrange for another person to perform the delivery services, without prior approval from Deliveroo, subject to the person not previously having their supplier agreement terminated by Deliveroo;
  3. Deliveroo did not have the right to control Mr Franco regarding the performance of his delivery services under the 2019 Agreement;
  4. Mr Franco was able to work for Deliveroo’s competitors simultaneously, and he had an unfettered ability to work for Deliveroo’s competitors;
  5. Mr Franco supplied the equipment to perform the delivery services, and was required to supply his own delivery vehicle and mobile phone; and
  6. The mode and manner of remuneration, fees and invoicing, indicated a contractor relationship.

Where Mr Franco was anxious to demonstrate the opposite, his case inadvertently offers a valuable insight in the difference between inside and outside IR35.

Key takeaways

A well drafted terms of agreement in writing between a client and contractor, incorporating core rights and obligations can be key in clearly identifying the intended relationship.

How the two parties operate in practice may no longer be as relevant.

Stating a role is outside IR35 isn’t enough. A well drafted agreement supporting the intended relationship must be in place.

For full details of Mr Franco case, please follow this link.

Protecting yourself against IR35 enquiry

Even if you have done everything right, it may not stop HMRC from looking into your affairs. An IR35 enquiry can cost in extra accountancy fees, your time and cause a fair degree of stress.

Sometimes insurance can help. Suited self employed professional indemnity insurance automatically includes commercial legal expenses insurance which would cover this type of situation. Specifically if your chances of rebuffing such an enquiry are strong.

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