‘I’m about to sign up through an agency
for a Client’s project lasting 3 months.
How can I avoid the consequences of IR35?’
This is typical of a vast number of
enquiries I receive daily – and there’s no doubt about it, IR35 continues to be
the biggest concern and subject of discussion for Contractors at present.
I take for granted that the great
majority of Contracts in this industry are for services which are capable of
legitimately falling outside the scope of IR35 – provided the contract terms
themselves don’t undermine that position.
We should all by now be familiar with the
basic test of whether or not the relationship between Contractor and Client
would be ‘employment’, were it not for the companies in between (if you need a
refresher on this, take a look at http://www.egos.co.uk/ir35_3.htm).
Where the real world position fits (as it
generally does, for Contractors), it’s very easy to design a contract that’s
outside IR35; however, minimising tax,
important though it may be, is not the only consideration for you as the
Contractor – and from the agency’s viewpoint, minimising the Contractor’s tax
is only a consideration because if they don’t cooperate, they will lose
business to those who do.
It remains vitally important to ensure
that the contract safeguards the commercial interests of both parties – the
agency needs to be confident that the Contractor will be committed and will
provide the agreed services; and the
Contractor needs to know that risks of non-payment and premature termination
are minimal, and that the contract is otherwise properly and fairly
balanced. And here lies the challenge –
to ensure that the tax consequences are acceptable, whilst at the same time
dealing properly with the commercial requirements of both parties. These are points which need to be properly
addressed before the contract is actually signed – it will be too late
afterwards. So read the contract
carefully – and be sure you understand all that is in it.
Probably the most important single point
is to ensure that the contract terms do not in any way amount to the Contractor
submitting to the control of the client. This will generally show itself in 4 ways –
control in what you do, and in where, how,
and when you do it.
There was a case some years ago of a
highly-skilled chef; whilst his ‘client’ had the right to tell him what style
of food to cook on any particular night, and even what dishes to offer. The question for the Court to decide was
whether or not he was to be treated as an employee – which depended on whether
he was subject to control; the Court’s
view was that ‘he is not controlled, you can tell him all day long what to do,
but you can’t tell him how to do it’.
Now that was a borderline case, and I don’t like people putting
themselves into the borderline – I’d much rather they knew their position was
clear-cut.
Before IR35 a typical contract might have
required the Contractor to accept a position (eg Developer,
Analyst/Programmer, etc), and to work under the Client’s direction and
control, at times and locations designated by the Client. All of these terms could now be fatally
damaging from the IR35 viewpoint. But
we can approach this in a different way.
Instead of (eg) ‘Position: Developer’, you could address the Client’s
requirements by for example saying ‘Consultancy Software Services - Development
and delivery of software code in connection with [project name], using [relevant
languages / skillset], in line with the overall project specifications for
the project’. Thus instead of accepting
a position where you are then appearing to submit to the Client’s
right to control what you do, the contract is simply specifying
the actual task that you have agreed to accept; the Client doesn’t have the right to switch you from one task to
another, and you are not submitting to control in what you
do. The important things are to
specify, in as much detail as reasonably practicable, exactly what you
will agree to do – and to avoid at all costs anything which could be
interpreted as giving the Client the right to tell you what to
do. Ask yourself this: if the Client asked you to do something
different, and you declined, would you be in breach?
Likewise the question of where; it’s not absolutely necessary for you to
have the right to decide where you perform the services – it should be
sufficient to see either the actual address specified, alternatively that you
will perform the services at such places as you and the Client agree
(or at a specified address, and also at such other places as you and the Client
agree). Again, ask yourself, if I
declined a request to work at a particular location, would I be in breach? The question when follows the
same pattern – ideally, you decide;
failing that, the Service Hours (don’t say Working Hours – try to avoid
‘the language of employment’) should be stated either as specific times, or as
‘such times as may be agreed’. Adopting
this approach should also deal adequately with the Client’s commercial requirements.
‘How’ is a slightly
different type of question; probably
the best approach here is to define the how by reference to some
objective standards – eg to say that you ‘will perform the Services with all
proper skill and care’ should be sufficient to meet the Client’s commercial
requirements, whilst avoiding any submission to control.
And, of course, having got all these
points into the contract, you then need to read the whole contract carefully,
and see that there’s nothing in else there which is inconsistent with them.
I certainly don’t say that questions of
‘control’ are the only points relevant to the IR35 employment test – but my own
view is that they are by far the most important; deal with them, and it becomes easier to deal with the other points. Fail to deal with issues relating to
control, and you may find your struggle much more uphill.
14th April 2000
I'd really appreciate your feedback on this FAQ - so mail me and tell me what you think of it, if it's been useful to you, or let me know of any specific problem you have where I may be able to help.
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