IR35: our examples - Chenguang and Kaye
Please note: this article does not provide legal advice.
This article is part of a suite - a whirlwind tour to get up to speed on IR35:
- Background to assessment. HMRC's intent, guidance, CEST tool - plus legal cases.
- Making employment status decisions. The big picture on employment status decisions.
- HMRC examples - Alan and Jemima. Quite simple, no CEST.
- Examples - Chenguang and Kaye. Two examples, including using CEST.
- CEST criticisms and responses. CEST can be helpful, despite the criticisms.
- Gaming the system and pressure. HMRC are targeting these.
In this article we assess two people with valuable expertise who are in business on their own account. They have limited - indeed no - right of substitution and are subject to limited control.
IR35 the easy way: Chenguang, marketeer
Chenguang is a graduate Chinese native living in the UK. Her one woman company provides marketing and written content for multiple UK companies looking to break into the Chinese market.
She has expertise and multiple clients. That sounds very much like outside IR35. Chenguang and her hirer separately carry out a CEST assessment before the engagement commences.
Chenguang’s website sets out her business model. She shares other details with the hirer.
Declarations and CEST decision
The declarations below - by Chenguang and by the hirer - yield an “outside IR35” CEST result.
|1.3||Limited company?||Yes||Yes||See note below|
|1.4||Has worker started?||No||No||Assess before starting the contract|
|2.1||Worker office holder?||No||No||Not (e.g.) company secretary|
|3.1||Reject substitute?||Yes||Yes||Can still be outside IR35|
|4.1||Change contract?||No||No||New contract or formal agreement|
|4.2||How work is done?||No||Yes||Worker has knowledge and expertise|
|4.3||Time work is done?||No||Yes||Worker is senior professional|
|4.4||Where work is done?||Task||Task||Place is set by task|
|5.1||Buy equipment?||No||No||Can still be outside IR35|
|5.2||Fund vehicle?||No||No||Can still be outside IR35|
|5.3||Buy materials?||No||No||Can still be outside IR35|
|5.4||Fund other costs?||No||No||Can still be outside IR35|
|5.6||Remediation?||Yes||Yes||Unpaid, lose opportunity for other work|
|6.1||Corporate benefits?||No||No||No employee benefits|
|6.2||Management role?||No||No||No (e.g.) staff supervision|
|6.3||Intro suppliers etc?||No||No||This would not happen|
|7.1||Known worker?||Yes (*)||Yes||Triggers questions below for hirer|
|7.2||Other client work OK?||Yes||Yes||Contract should not prevent similar|
|7.3||Need permission?||No||No||Other clients, no permission|
|7.5||Previous contract?||No||No||First contract between parties|
|7.6||Contract one of series?||No||No||No need for this|
|7.7||Contract can renew?||Yes||Yes||But no mutual obligation|
|7.8||Majority of time?||Yes||Yes||Worker focus = this contract|
|7.9||Self-emp’d work?||Yes||Yes||Over last 12 months|
(*) If the hirer had stated “no” the decision would still have been “outside IR35”.
Comments on each CEST section
Section 1: about you and the work
The opening screen asks “What do you want to find out?”
- If the off-payroll working rules (IR35) apply to a contract means the worker will be operating through a limited company and the contract is to be assessed. This is the case for Chenguang.
- If some work is classed as employment or self-employment for tax purposes means assessing the work status for someone without a limited company. Out of scope here.
Perhaps taking “reasonable care” includes carrying out the assessment before work begins.
Section 2: Worker’s duties
Like most of section 6, this should be easy answer, especially given HMRC’s examples.
Section 3: Substitutes and helpers
This often causes hirer concern. I have taken the position here that the position is so expert in nature that no effective substitute is known, meaning the hirer can refuse a substitute.
Despite the stance above, where a hirer simply wants an effective service delivered it should be willing to agree to an appropriately qualified substitute at the worker’s discretion. It can take comfort if the contract can be cancelled for any reason with, say, one day’s notice.
Section 4: Working arrangements
Sometimes known as control, this section makes “reasonable” declarations to reflect the worker’s seniority and expertise, especially in relation to how and when the work is done. The location is set by the task and can sometimes depend on security-related factors.
It helps both parties to specify (e.g. in the contract’s project scope) the purpose for which the worker is hired and what work is to be done, but not usually how it is done.
This helps both parties to judge whether the work has delivered on expectations, avoiding misunderstanding and potential financial risk.
Section 5: Worker’s financial risk
There are three types of financial risk:
Funding is covered, but the question makes it clear that (e.g.) laptops are not covered. This is odd, as the HMRC example mentions laptop provision or non-provision for Alan and Jemima.
HMRC's twelve business entity tests
These were withdrawn in 2015, but suggested that holding professional indemnity insurance and advertising were both indicative of being outside IR35. Clearly these need to be funded and both may generate no return.
Ebb and flow - sometimes known as “feast and famine” is not covered by CEST. It reflects the point that contractors can go months without work.
I suspect a court would have a more generous stance with both points above.
Remediation is covered by CEST and can be a costly business. A professional contractor or consultant will want to deliver value for his client. Big consultancies are mindful of the potential opportunity and compensation costs which can arise. Consequently, they may include lengthy “out of scope” sections in a contract.
Section 6: Worker’s involvement
Sometimes known as “part and parcel”, this section should be easy to complete.
Section 7: Worker’s contracts
Business on own account: contractor and hirer
This is where the assessor can demonstrate that the worker is in business on their own account.
Once a likely contract is on the table a contractor will be able to fill in this section, which asks questions about the contractor's business.
If the hirer is using CEST without knowing the worker's likely identity the CEST questions will stop and CEST will return its assessment: outside IR35 for Chenguang.
This section includes the nature of contracts. Despite a question on a series of contracts, CEST does not ask about mutual obligation. Allowing a contract to be extended - other in time of scope - seems more natural, although this would need a formal change to the contract.
The hard way: Kaye Adams, TV presenter
In February 2021 we learned that HMRC had failed in its IR35 appeal against Kaye Adams. It had already failed in its original case. Caught up in a long legal battle, Adams’ journey was hard.
The Upper Tribunal said Adams was:
... an expert with a proven track record of presenting popular and successful shows. However, provided that the show continued to answer to the description of “The Kaye Adams Show”, there was no constraint on the BBC’s right to determine the content or format of the show.
The Tribunal’s words suggest that:
- Expertise and track record mattered.
- Substitution didn’t matter; the named show had to be presented by Adams.
- Control from the BBC need not be constrained, though Adams had significant autonomy.
Probably also helpful to her case was Adams’:
- ability to work for client B while (within the contract) also working for client A
- “ebb and flow” point - a.k.a. “feast and famine”
But the curious thing is that a CEST assessment might have suggested, all along, that Adams fell outside IR35. Perhaps she had no CEST output.
In this article we looked at a one person company supplying expertise to a range of clients. With apparently reasonable declarations we easily secured an “outside IR35” output from CEST.
That could have been very different if the worker had a single client: don’t game the system.
The point of this article was absolutely not to suggest “gaming” the CEST tool - HMRC notes that no one should do that. But some suggest that you need to think about hundreds of factors and buy software to support your decision process.
Instead clear thinking about what’s actually involved in the required work and what actual working practices will be can help build up a practical set of IR35-related heuristics. Your expectation can be be supported by legal precedent and confirmed by CEST outputs.