You'll need to bear with us here - some of this gets quite theoretical and a bit jargony.
To assess IR35 status HMRC will construct a notional contract; this contract doesn't really exist but is a way of evaluating whether, if there were no intermediaries (i.e. no limited company, agency, etc) involved, would the workers relationship with the end-client be closer to employment or self-employment?
Three of the main status indicators are:
IR35 Indicator - Right to substitution clause
Can a substitute be sent if you're sick for a long period, on holiday, or the substitute has certain technical skills required for a particular task? If so, how fettered is that right to substitution? – i.e. does the substitute need to be agreed in advance? Or is the client simply entitled to refuse a substitute irrespective of whether they may have the necessary skills? If a client only allows a substitute after a formal interview and written permission, then it is unlikely to be accepted as a clear right of substitution.
If a right to substitution clause exists then HMRC would try to establish whether or not it was genuine. Has a substitute ever been sent? Who picked up the cost is an absolutely key point. Documented proof will be examined and many freelancers will agree a written procedure with their end-clients on the process for sending a substitute. This will cover access to the building, computer access, adhering to site policies, etc..
IR35 Indicator - Mutuality of obligation (MoO)
This is a complex area of law with subtle variations of interpretation. Broadly Mutuality of Obligation (MoO) boils down to whether the client is obliged to pay for simply turning up to site, just as there would be if an employee shows up to work. It would be very difficult to argue that there was an absence of MoO where a contract doesn't allow a client to terminate immediately.
Any reliance on a MoO clause must reflect the real situation. MoO is more likely to keep a freelancer outside IR35 where terms are mirrored within each contract in the supply chain, and confirmed separately in writing between the end client and the freelancer.
IR35 Indicator - Control
For IR35 to apply there must be control over how the work is done. The broader the contractual objectives and timeframes the better for IR35. A freelancer dealing with issues as they happen within an organisation is in a weak position. Working on set projects, agreeing defined milestones and timeframes and working from your own offices would all be positive indicators that the worker has control.
If there is an agency involved then you may not know the details of the upper contract between the agency and end-client. A freelancer may benefit from confirming in writing the reality of the underlying arrangements with the end-client.
IR35 - Forming An Opinion
If all three of these suggest the freelancer is caught by IR35 then it's unlikely that other factors will have any bearing. If there are aspects of employment and self-employment then secondary factors such as ‘financial risk’ and being ‘in business on own account’ will be tested:
Financial Risk - assessment includes risk of not being paid, sick pay arrangements and employee-type benefits, fixed-price job-costing.
In Business On Own Account – business has office facilities, website, stationery, employees, marketing, training, public & employer liability cover, professional indemnity cover, other projects under. Not part-and-parcel of the End Client organisation.
Once the principals behind IR35 legislation are understood, many freelancers are comfortable deciding upon contract status without professional help. Complacency is dangerous as a strong audit trail is essential; all contract assessments should be accurately and honestly documented.