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HMRC internal manual

Employment Status Manual

Considering the evidence: general

This section and the sections up to and including ESM8560 deal with consideration of the evidence obtained in an IR35 case and apply both in a customer service and a compliance context.

An essential condition that has to be satisfied before the legislation will apply is that the worker’s services are provided in circumstances such that he or she would have been for income tax purposes an employee of (for NICs, employed in employed earner’s employment by) the client if the worker had contracted directly with that client. Under the new rules, we are able to look through the intermediary.

The existing status tests, which are unchanged by this legislation, are used to decide whether the relationship between the worker and the client would have been a contract of service/employment but for the intermediary. The legislation requires the construction of a notional or hypothetical contract between the worker and the client - see the case of Usetech Ltd v Young (76TC at p.826, paragraph 9). But the tax legislation also says that regard should be had to the terms of the contracts under which the services are provided and the NICs regulations refer to arrangements involving the intermediary.

Additionally, it must be borne in mind that account may need to be taken of the worker’s personal factors (see ESM0549onwards and the “Charlotte” example at ESM8515).

In the case of Lime-IT Ltd v CIR (Spc342), the Special Commissioner stated that

“In future cases on this legislation (and its income tax equivalent) the Special Commissioners will wish to explore at a preliminary hearing whether it is possible to obtain evidence from the client.”

Guidance on the application of the case law test can be found at ESM0501onwards. A Tax Bulletin article providing guidance on the application of the test in connection with the legislation was published in February 2000.