IR35 Supervision, Direction and Control Explained

One of the essential factors that HMRC uses to sniff out false employment via IR35 is the concept of ‘Supervision, Direction and Control.’ This is a concept that has undergone a few changes over the years but the basics are still relevant to every working contractor who has a healthy fear of being caught by IR35. In this article we will look at ‘SDC’ in full, in order to help you navigate all that it entails in your working life.

Understanding ‘Supervision, Direction and Control.

The first thing to do is make sure you fully understand the importance of SDC. Contractors these days all understand why control is such an important factor in staying outside of IR35 and SDC is a crucial part of that concept of control. There are four fundamentals that make up HMRC’s control test and they are

  1. (1) What work is being carried out?
  2. (2) When is it being carried out?
  3. (3) Where is it being carried out?
  4. (4) How is it being done?

When it comes to the concepts of ‘supervision direction and control’ it is number 4 that is relevant – are you, as a contractor, being supervised, directed or controlled in how you go about your work for the client? And how do you answer that question? Luckily, HMRC has provided some guidance on this one:

HMRC Guidance on Supervision

As a contractor, you will be deemed to be subject to some kind of supervision if your work involves another person ‘overseeing’ you as you work. This is considered supervision because the person overseeing you is essentially ensuring that you are doing the work you are supposed to be doing and checking that you do it in the correct way. Additionally, if the person overseeing you is deemed to be helping you so that you can improve your skills and depth of knowledge, this training would count as supervision too.

HMRC Guidance on Direction

As a contractor, you will be deemed to be subject to some kind of direction if there is someone from your client company making you do your contracting work in a certain way. A director would be someone who gives you advice, guidelines or instructions as to how to do the work. They might also coordinate with you as to how the work is done while you are doing it.

HMRC Guidance on Control

As a contractor, you will be therefore deemed to be subject to control if someone is telling you what work you are to be doing and how you are to then go about doing it. Additionally, they would be deemed to be controlling you if they also had the power to transfer you from the job you are doing to another, different job.

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HMRC Muddies The Water Even Further

If it was just those three definitions then it would be relatively simple but HMRC decided to make the test even more difficult to pass. Firstly, they made clear that any person is able to subject you to supervision, guidance and control, not just the end user for you to end up failing the test. Secondly, they also made clear that anyone can just have the ‘right of’ SDC over you in order for you to fail that test (it needn’t be exercised, just present.) Lastly, only one of the three needs to be present in order for you to fail. Just being supervised, or just being directed would qualify you to fail.

This obviously makes things much harder and has been the cause of much annoyance in the contracting community, particularly when HMRC has been quoted as saying more generally that: “Where there are procedures, methods and instructions which must be followed, it is likely there will be SDC over the manner in which the services are provided.”
Nevertheless, there is some reason to be cheerful. In Staples v Secretary of State for Social Services it was ruled that simply giving a brief to a contract worker was not enough grounds for the provider of the brief to be considered as exerting SDC over that contract worker. Additionally, there are of course steps you can take to prevent supervision direction and control.

Steps That Can Be Taken To Prevent Supervision Direction and Control:

Contractual Steps

If you have never been subject to SDC during your actual contract work then the only place you have to be worried about is the contract itself. Thus the contract becomes more important when it comes to the terms that address the right of control and it is essential that there are no clauses that show any exertion of control. If the contractor handles this himself that’s fine but if it is through an agency the contractor may not see the upper levels of the chain. If that is the case it is essential that the contractor asks the agency to put in a clause in the lower level contract which states clearly that all contractual provisions will be mirrored in the upper contract. If not, the contractor is then entitled to sue.

Empirical Steps

After this contractual step has been taken the contractor then needs to put in place a ‘Supervision Direction and Control’ specific Confirmation of Arrangements document. This will be a strategic document that helps to verify the lack of SDC. It does this by making clear that the common features of SDC are not and will not be present in this working arrangement and confirms this by getting the end client, agency and contractor to all sign it.
Additionally, it is worth keeping hold of emails between yourself as contractor and the end client in which you discuss any services requested of you by the client that are not defined in the contract and which have to be done quickly without a chance to clearly define them in another contract. Your input on these emails will be essential in order to show that you cannot be simply moved around jobs at the whim of your client. You should also keep any documents in which the end-client’s requirements are outlined and you have responded with your own requirements and suggestions. Get into the habit of doing this for all of your contracts.

Precautionary Steps – IR35 Insurance.

One thing to bear in mind is that it is possible these days to actually purchase IR35 insurance. Start by checking your current business insurance but it is unlikely that this will cover you. However, if you are concerned about getting caught up in IR35 it is worth looking into one of the many policies out there which will cover your current and future contracts (and sometimes will even cover your past ones too) against the costs of any investigations and demands for tax.

Research The Case Law

Lastly, if you need more information and reference points it doesn’t hurt to read up a bit on the past case law for IR35 infringements. There are a number of prominent cases that have already been before the courts which illustrate that contractors are not always controlled via SDC in the way that HMRC likes to paint them as being.

For example, in ‘Morren v Swinton & Pendlebury Council’, the judge was swayed by the argument that when assessing a highly skilled professional contractor, supervision and control was not really a suitable method for that assessment. And in ‘Marlen Ltd’ a contractor at JCB known as Mr Hughes had been briefed as to what was to be built by a project manager. The engineering manager at JCB said that as a contractor he would be under the control of a number of project leaders. Actually, in reality all that really happened was that they oversaw the project and occasionally checked on the project’s progress. He had to report to senior designers on a daily basis and took occasional instructions but that was all and he was only a small part of a much bigger project, hence the need for this contact. The court accepted that such direction was reasonable in order to make the project run smoothly and this was not therefore a case of SDC and IR35. The court’s argument was essentially that the degree of control has to be judged in context with what is being worked on and produced. Lastly, in the case of ‘Primary Path Ltd’ it was again made clear that the issue of control is more difficult to adjudge when the person has been contracted for their highly specialist skills. When a contractor, Mr Winfield was brought into a team for his very specialist skills to help with one particular project, there was some supervision and direction for that project but when it came to the management of the project as a whole he was given free rein to work how he wanted. The court ruled that the level of control exercised did not go beyond anything you would expect from engaging an independent contractor.

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