‘To try and avoid the consequences of IR35, two of
my colleagues and I have put a proposal to our Client. Until now, the three of us have been providing
DBA functions and support to the Client, under the Client’s management. The idea is that we will form a new company
in which we will all be shareholders & directors, and that new company will
enter a fixed price contract to give the client the same overall service, but
managed by us.’
Many
Contractors have been prompted by IR35 to choose this direction as a ‘next
step’ to developing their own businesses.
Performing such functions as these for a client, where the client is deploying
the individuals in terms of time and place so as to ensure that there is
constant cover, can be a little tricky to express in terms which fall outside
IR35 – I don’t say that it is impossible (because it isn’t), but it does
require a reasonably high degree of trust and cooperation between Contractor,
Agency, and Client to end up with terms which clearly fall outside IR35. This is because one of the factors which
risks making the arrangement IR35-vulnerable is the fact that the Client may
need the right to shift each of you around in terms of the time and place at
which each of you work.
However,
when you consider that in fact all the Client is shuffling round is the three
of you who (taken together) are the only ones providing the Client with the
complete service, then one can see that you could instead go for a structure
whereby the three of you accept joint responsibility for providing the
service. You then manage between
yourselves when and where each of you contribute towards that end result, and
by accepting this as a joint responsibility, the client no longer needs the
same requirements for control, and it is then much easier to define the
relationship in a way which clearly falls outside IR35. So in principle, this is a good idea. And I have seen several groups of
Contractors take this route.
There
are however some aspects which you should bear in mind.
First,
it is critically important that you set up a new contract with the Client which
comprehensively covers all aspects of what you will be doing. When the ballpark changes from selling your
skills by the hour (to be deployed as the client sees fit), to selling a
specified service for a fixed price for a period, then it suddenly becomes far
more important for both your own and the Client’s protection to ensure that the
actual service itself, together with the ‘how where and when’ of it, are
clearly defined – anyone should be able to see, by simply reading the contract
itself, exactly where the boundaries lie between what you are and what you are
not committed to doing. All these
things need to be clearly and objectively defined - the Client needs to know
that what you say in the contact that you will do will in fact satisfy their
needs, and you yourselves need to know that you can actually provide what the
contract says you will provide. And all
without any adverse consequences, either tax or commercial, and whether for
yourselves, or for the Client.
So
it is very important to get the specification of the work in the contract (1)
accurate, and (2) acceptable to both parties.
And all this needs to be set in the context of a contractual framework
which provides all proper commercial protections for both parties.
Secondly,
the pricing of such an arrangement is probably best expressed as a fixed sum
for the period, but against that background it is certainly possible to provide
some flexibility, whereby if the Client and you agree to provide additional
services over and above the ‘core’, then those might be chargeable on a time
basis.
Thirdly,
you are entering an arrangement where the fortunes of the three of you are
going to become much more interdependent on each other’s performance; the new business (and yes, it is always
advisable to set up a completely new company for such ventures) in which each
of you has an interest will profit from the successes of each of you. Likewise, failure on the part of one will
cost you all. Don’t enter such an
arrangement unless you trust your colleagues as human beings, and have respect
for and confidence in their professional abilities. And even then, you would still be wise for the three of you to
also enter a formal Shareholders’ Agreement, to record the way in which you
have agreed to run and control your new joint company, and to include provision
for what happens if in the future someone wants ‘out’.
The
final issue you need to consider is the terms under which your services have
until now been provided to the Client;
almost all agencies will seek to insert a term in their contracts with
Contractors which seeks to prevent the Contractor from providing services to
the Client, other than through the Agency, for a period after that contract
ends. If there are any such
restrictions in your contracts, then you will need to consider the precise terms
of those restrictions very carefully, and you may need to take expert
advice; you will need to form a view on
whether the terms would actually operate to restrict what you intend to do, and
whether or not the restrictions are likely to be legally enforceable. You will then have to consider how to handle
that issue. And you should bear in mind
that the Client itself may be subject to similar restrictions in its own
contracts with the agencies who to date have supplied your services.
9th June 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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