Following on from our series of blog posts about IR35 and what it means for contractors, we will look at the term “disguised employee”.

History of IR35

In 2000, the UK Government introduced new tax legislation called IR35, which, when applied by Her Majesty’s Revenue and Customs (HMRC), was designed to identify “disguised employees” and tax them accordingly – as if they were employees.

Contractors trading as a limited company who failed HMRC’s tests of employment and would otherwise be employed by their client were it not for their limited company intermediary are classified as disguised employees.

The UK Government defines a disguised employee as “workers who would have been an employee if they were providing their services directly to the client.”

How IR35 “catches” disguised employees

The IR35 legislation includes tests of employment which HMRC uses to assess working practices. They apply precedents from past court and tribunal rulings to decide whether the contractor is genuinely in business on their account or is a disguised employee.

IR35 is applied on a contract-by-contract basis, not to the general contractor. This means that a contractor could be classified as a disguised employee on one contract but not another. Contractors can even be found to be inside and outside IR35 on a single contract – if their working practices change halfway through the contract!

If a contractor fails the test of employment and is deemed to be inside IR35 for their contract and HMRC determine them to be a disguised employee – then they will have to pay National Insurance Contributions (NICs) and income tax on their contracting fee income as though it was income from employment.

What are the “tests of employment”?

HMRC uses three main employment tests to determine whether a contractor is in business on their account or a disguised employee. The three main tests are:

#1 Control

If a contractor is told by their client where, when and how to complete the tasks allocated to them on their contract, then they are considered to have failed the control test

#2 Substitution

If a contractor cannot send a substitute to the client to complete their allocated tasks, they are considered to have failed the substitution test.

#3 Mutuality of Obligation (MOO)

If a contractor expects a client to give them work, and the client expects that contractor to complete the work, they are considered to have failed the MOO test. MoO doesn’t feature in the government CEST tool due to the view that there is always MOO in any relationship as soon as any work is undertaken; recent IR35 tribunals have used a lack of MoO in defences.

These three tests are the most well-known, but there are numerous other things that HMRC and a court or tribunal will consider to help them decide whether a contractor is a disguised employee.

If you want to discuss IR35, contractors and disguised employees in further detail, please email our managing director Jonathon Webley at

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