Disregarding the various schemes which may be set up with the object of
avoiding or mitigating the consequences of IR35 (and which may or may not stand
up in court!), the prime way used by the majority of contractors to retain
control of their own affairs and remain outside IR35 is to ensure that the
assignments they accept are capable of falling outside its scope – and that
they are expressed in the contract in a way that reflects that. There are two basic approaches:
1
Services – the ‘control’ approach: a contract for the provision of a specified service, preferably
with a deliverable of some sort, whether tangible (eg specified software), or
intangible (eg support of specified software), in either case where to the
extent not defined in the contract, the nature, manner, time, and place of
performance are under the control of the contracting company and not the agency
or the Client – or (at the very least) are specified in the contract as being
subject to agreement.
The key essential of this
approach is ensuring that the contracting company is engaged to provide specified
services, and is not under the control of the agency or the
client in the nature of those services, or the manner,
time or place in and at which they are provided. You’re there to provide a service, and not
at someone’s disposal to be told what to do.
Take this approach of
specifying the services, and there is no real IR35 problem with specifying the
individual who is to provide those services – although it may be preferable to
say that the parties envisage that the services will be provided
by a named individual, as opposed to saying that they will be
provided by someone named.
2
Body hire – the ‘substitution’ approach: a contract for the hire of a body, where the contracting company retains
the right to decide on a day to day basis exactly who that body should be. Much has been made of the insertion of
rights of substitution. A free right of
substitution may be capable of taking the entire contract outside the scope of
IR35, whatever the rest of the contract says, and for that reason this has been
a popular approach amongst contractors.
However, it has its downsides:
The right of substitution
must be genuine; it must be a clear
right on the part of the contracting company to choose who performs the
services; neither the client nor the
agency should have the right to prevent the contracting company using any
adequately qualified individual, other (possibly) than on reasonable and
specific grounds (eg if it could be shown that a specific individual if there
were real grounds was a security risk).
Actually exercising the
right of substitution, by sending someone else occasionally (and getting paid
for doing so!) - and of course documenting that as insurance against later
audit by the Revenue - is of course the most straightforward way of proving the
right of substitution to be genuine.
Often however actual substitution does not happen – and where the right
is not in fact exercised, there can remain an open question as to whether or not
the right is in fact genuine.
Now imagine that, three
years down the line, you have a Revenue audit, and the chap from the Revenue
looks at the contract, sees the name of the ‘client contact’ on the contract,
picks up the phone, and calls him/her to ask a (possibly loaded) question as to
whether or not they minded who your company sent on a day to day basis to
perform the contract. (That of course
would not be the proper question to ask – the proper question would be whether
or not the client had the right to object if your company sent
someone else – but that is another story.)
What I’m saying is
this: that for the ‘substitution’
approach to work, the right to substitute must be a genuine right; and where this is relied on by the
contractor as the sole way round IR35 in cases where the right has not been
actually exercised, there may be considerable difficulties in proving the right
to be genuine if the client gives the wrong answer.
(I am sure you can also see
why I personally do not think it a good idea to name ‘client contacts’ in the
contract…)
Whichever approach one chooses, it remains of course important to pay
regard to the various other factors set out in the Revenue’s guidelines as
employment or non-employment pointers (particularly those which are actually
supported by legal authority – some are, and some are not!), and to cover those
points, insofar as is consistent with the services actually being performed.
And then, finally, read the contract;
does it actually make sense? Is
it all clear in meaning, and actually relevant to what you will in reality be
doing? Will it give a Revenue inspector
auditing you at a later date a clear and accurate picture? If it does give such a picture – and if that
picture is indeed one which is outside IR35 – then you are on the right
track.
But do beware the dangers of having something in the contract which
does not actually reflect what is happening – if something in it can be shown
to be less than accurate, then your credibility may be damaged. And if that point is one on which you are
relying for the contract’s IR35 status, then you may be storing up a problem
which will not raise its head until later – and maybe long after the problem
can easily be handled.
For these reasons, my own view is that whilst the substitution approach
has its benefits, it is unwise to rely solely on that as the means to get a
contract outside IR35. The wise
contractor will always also use the ‘control’ approach, where that is consistent
with what is actually happening.
18h
August 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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