The term “fractional working” is one we are hearing a lot at the moment. Businesses that are not ready for a full-time employee in a role such as CFO, CTO, or other senior executive are increasingly engaging experienced professionals on a part-time basis instead, and we receive lots of questions around the associated IR35 risk.

For businesses, hiring a fractional contractor can be an attractive way to access senior expertise without the commitments or cost of taking on a permanent employee. For contractors, it can offer flexibility, variety and the opportunity to work with multiple clients simultaneously.

But, if you are providing your services through a limited company, there is another consideration that should not be overlooked: IR35.

The IR35 legislation (including its more recent off-shoot, Off-Payroll Working) is designed to prevent individuals from working in the same manner as employees whilst gaining tax advantages associated with operating through a limited company. Where IR35 applies, the income from the engagement is deemed as employment income for tax purposes.

Who is responsible for deciding the IR35 status of a relevant engagement depends on who the client/hiring organisation is. If the client is a small company, the contractor is responsible for determining their own status under the pre-existing Chapter 8 ITEPA rules. If the client is in the public sector, or is a medium or large private sector organisation, responsibility falls on the client under the Chapter 10 Off-Payroll Working rules.

As fractional working is becoming increasingly common in the contracting world, understanding whether you are exposed to IR35 risk is important.

What is “fractional” working?

Fractional working is where a business engages an experienced professional on a part-time or ad-hoc basis rather than employing them full-time. A fractional executive contractor may work with several businesses at the same time, dividing their time and expertise across multiple clients.

The arrangement is most commonly seen in senior leadership positions such as CFOs, CTOs, COOs and CMOs. For a number of reasons, a business may only require strategic input for a few days each month or each week, making a full-time appointment unnecessary.

For IR35 purposes, a contractor working fractionally for multiple clients must consider each client relationship separately (each a “relevant engagement”). A contractor could have three clients simultaneously and find that one engagement falls outside IR35, one falls inside IR35 and the other is borderline.

Having multiple clients can be helpful to an overall position, but it does not automatically follow that all will be outside IR35 for this reason alone. The question is what the working relationship looks like with each individual client.

When a fractional role may be outside IR35 vs inside IR35

First, ask yourself why you have been engaged. We frequently see cross over with “fractional” vs “part-time interim” which can be two quite different scenarios.

Does the client need specialist expertise to deliver a number of defined outcomes over a temporary period? Or do they need someone to fill an integral role that is heavily embedded within the organisation and would ordinarily be undertaken by an employee?

The context provides important clues as to whether the engagement could be seen as disguised employment, and part-time does not automatically equal outside IR35.

IR35 status is determined by the reality of the day-to-day working relationship. It requires consideration of the established status factors, but also stepping back and looking at the picture as a whole.

Indicators that a fractional role may be outside IR35:

• The contractor is being engaged temporarily for a clearly defined purpose or business requirement rather than filling a BAU role.
• The engagement is focused on a specific project with defined deliverables, e.g. setting things up for a start-up, or a business transformation.
• The contractor is providing strategic advice and recommendations, without involvement in day-to-day operational management.
• The contractor has specialist expertise that the client does not possess internally, or need on a permanent basis.
• The contractor retains a significant degree of autonomy over how, when and where their services are performed.
• The contractor operates through a genuine business and works with multiple clients.
• The contractor is not integrated into the client’s organisational structure in the same way as employees.
• The contractor has a genuine right to send a substitute in their place.

Indicators that a fractional role may be inside IR35:

• The contractor is performing a BAU role that would otherwise be filled by an employee – e.g. someone may have left and the role is an “interim”.
• The engagement is open-ended and has little to no clearly defined deliverables.
• The contractor appears on the company’s organisation chart as part of the team and management structure, and is integrated into operational decision-making.
• The contractor line manages employees and exercises managerial authority.
• The contractor has authority to hire and fire staff, or conduct performance management activities on behalf of the client.
• The contractor is subject to direction and control from the client over what they do and how the services are performed.
• The contractor is treated similarly to employees, regardless of what the written contract says.
• The client expects the individual to undertake the work personally and would not realistically accept a substitute.

None of these factors are strictly determinative on their own, but all will contribute to the overall picture.

Tips for managing IR35 risk

As with any limited company engagements, fractional contracts require careful consideration.

Ways that you can reduce risk:

• Ensure there is a strong contract that clearly sets out defined deliverables or objectives.
• Make sure working practices align with the contract. A well-drafted agreement will provide little protection if it does not reflect the reality.
• Ensure you can demonstrate you operate as a genuine independent business wherever possible. This includes maintaining your own branding, professional presence, insurances and business infrastructure.
• Working for multiple clients can help support the picture of being in business on your own account. But this is not determinative on its own – remember that IR35 must be considered separately for each engagement.
• Keep evidence demonstrating the project-based or specialist nature of the engagement.
• If the client is a medium or large organisation, ensure you receive a Status Determination Statement setting out the client’s IR35 decision and reasoning.

Avoid assuming that a role is outside IR35 simply because it is described as “fractional”. HMRC and the tribunals will be interested in the day-to-day nature of the working relationship, not how it is labelled.

Conclusion

Fractional working is likely to remain a popular option for both hiring businesses and senior professionals. It offers flexibility, access to specialist expertise and a cost-effective alternative to permanent hires.

However, a fractional CFO, CTO or other executive can be either inside or outside IR35 depending on the reality of the engagement.

If the arrangement looks like the provision of independent specialist services with defined purpose and deliverables, there may be a strong case for an outside IR35 position. If it looks more like someone sitting in a BAU management role within an organisation, then regardless of how little working hours are involved, it may be inside IR35.

If you are unsure about your position, it is advisable to have both your contract and working practices reviewed by a human expert capable of assessing the overall picture against employment status case law.

Our IR35 review service examines both contractual terms and the practical reality of the engagement to provide a robust opinion and evidence of reasonable care.

For contractors undertaking multiple engagements, our Contractor Guardian service can also provide valuable support by building a comprehensive compliance history over time and providing defence assistance should HMRC ever open an investigation.

A little preparation now is usually far less painful than dealing with an investigation later.

Browse our full range of services for all parties in the contractual chain here. 

Visit our IR35 Hub for further IR35 / Off-Payroll Working guidance.