One might be forgiven for thinking that the government's controversial IR35 proposals, having been rejected by the House of Lords on 13^th October, are dead. Wrong, I'm afraid. The fact that the House of Lords may have voted against the proposals in the form in which they had been presented to them will not mean that the plans, which at times may have appeared to risk fundamentally changing the face of contracting, will go; they will simply re-emerge in a different format.

The following points seem to me to represent where we stand today:

• New rules fundamentally affecting the tax and NI position of Contractors will come into force with effect from April 2000
• The responsibility for complying with those rules will rest on Contractors and their companies, not on Clients or agencies. Neither clients nor agencies will have to change their ways of doing business - though there will be other reasons why wise agencies will wish to do so - and I will certainly be giving that advice to those agencies who are clients of mine (reasons set out below)!
• The basis on which Contractors and their companies will have to pay tax and National Insurance on income from contracts is likely to depend on two things - first, whether or not, on a true construction of the written contract, the relationship it sets up between the agency and the Contractor's company would (as a matter of law) be one of employment, if (hypothetically) the contract had been between the agency/client and the Contractor personally, rather than the company; and secondly, whether or not that contract actually reflects the true relationship between the agency/client and the Contractor.
• Contractors will have the responsibility for taking the decision, in relation to each contract, as to whether or not it is an 'employment-type' contract ('ETC'); getting this decision wrong could be expensive. It is likely that the Revenue will offer a service, whereby they will provide a ruling on as to whether any particular contract is an ETC or an NETC - but it is unlikely that they will be able to do so before you actually have to sign! Lawyers and accountants who deal regularly with Contractors should be able to give reasonably accurate advice on this question, when the time comes.
• The Contractor's company will have to pay tax and NI on all income from ETCs, apart only from (a) benefits in kind (you pay tax but not NI), (b) approved pension scheme contributions, (c) expenses on a very restrictive basis related to that specific contract, and (d) 5% of the contract income towards general overheads. The major changes are that the ability to set against tax other expenses (including those incurred developing other business ventures within the same company), and to reduce the burden of tax and NI by paying dividends to yourself and partner, will both go.
• For income from contracts which are not 'employment-type' contracts ('NETC's), nothing changes, and the world continues as before (at least until the next time the government decides to have go at it, that is!).

So next, we need to look at the question of what in fact is an ETC. Hard and fast rules there are not - it is a case of looking at various factors and pointers, then stepping back and viewing the overall picture, and finally forming an opinion. To some extent there is overlap between them, and in any event it is unlikely that any one factor on its own will be conclusive - but it is not simply a matter of adding up the plus and minus points and drawing an arithmetic conclusion. An Expert System, rather than simple Boolean logic would be required. Contractors should take professional advice, at least in the early stages of the new legislation - but they should still have a good idea of what those factors are. Some are more relevant than others to our industry, but the Revenue will look at them all, and so we will too.

1. Control - the more the contract specifies that you are subject to the control of others in what you do, where or when you do it, or how your work is to be done, the more this points towards employment. Whilst control over none of these would result in a virtually meaningless situation, control over all four of these would be a strong employment pointer ('EP').
2. The right to appoint a substitute or take on an assistant - if you have this right, then it's a strong non-employment pointer ('NEP').
3. Provision of equipment - where the major items of equipment you use are provided for you, this is an EP. May not be particularly relevant to our industry (you can hardly be expected to bring your own Cray, can you?), but being required to provide your own laptop could be a plus.
4. Financial risk - a thorny one, this; the more you are at risk (whether of not being paid, or of making a loss - eg by buying equipment, or working on a fixed price basis, or of having to put right mistakes in your own time or pay compensation for consequences of defective work), the stronger the NEP.
5. Basis of payment - payment on a fixed price basis is an NEP, payment by the hour is the opposite.
6. Opportunity to profit from sound management - the ability to make more profit by containing overheads and effective organisation of work is an NEP. Again, some overlap with the concept of a 'fixed price' basis of payment.
7. Right of dismissal / termination - the right (by one party or the other, or both) to terminate on notice (ie without cause) is an EP.
8. Employee benefits - sick and holiday pay, pensions, & expenses are (especially in longer contracts) EPs.
9. Length of engagements - long engagements, or regular working for the same agency / client, may be EPs.
10. Personal factors - things within your sole control, and not in the contract itself; basically, acting as though you are running a business, rather than acting as an employee - eg expenditure on office accomodation and equipment, and PI insurance - is an NEP.
11. Declared Intention - an easy one, this; the contract should expressly state that the Contractor is not an employee of the agency or the client. A minor point, but it may help. An easy NEP.

Finally, the hidden 'gotcha': the question of whether or not the written contract actually reflects the true relationship between the agency/client and the Contractor. You can say what you like in the written contract, but it risks getting shot down in flames if it doesn't actually reflect the reality of what is happening. Admittedly, it may be rare for enquiries to be made about the reality of the situation, but they could be, or a careless statement made unthinkingly (by you, or someone else) to the Revenue could open up a can of worms. You must act as though the wording of the contract does in fact represent the reality of the situation.

Overall, if you want a particular contract to be an NETC, then you want the picture that emerges from the above to be one of an engagement within the context of someone carrying on business on their own account, rather than an employee.

One thing that emerges from the above is that many terms which Contractors may have preferred to see in contracts in the past (in order to give greater security) may need to be viewed somewhat differently in the future by the Contractor wishing to ensure their contracts remain NETCs. To achieve this status, Contractors may have to carry a greater degree of risk.

Agencies which are co-operative in assisting Contractors to structure their tax affairs in the way Contractors desire (within the limits of what is legal and proper, of course), by offering contracts which do not fail the NETC test are (in my humble opinion) likely to have a strong competitive advantage. In my first article on IR35 (FI 31^st March 1999) I set out some figures, which broadly showed that the Contractor on an ETC would expect to be left with 57% of the total contract income after tax and NI, whereas the Contractor on an NETC would expect to be left with 70%. Faced with a choice of two contracts, one of which leaves you with 13% more - kinda difficult to choose, innit? Not!

My articles always carry a disclaimer at the end, but today I'm also going to add an extra one: this article is not intended to be a statement of the law, either now, next year, or at any other time; it is simply my own current prediction of how changes currently under discussion are likely to end up. Whilst Contractors and Agencies should be aware of the issues I'm discussing, the new laws (when they are finally passed) may differ from what I say here, and so

1. do not plan your business affairs on the assumption that what I say is right; instead, keep sufficient flexibility in your contractual arrangements to be able to negotiate any necessary changes, once the new rules become cast in stone. In particular, it may well be unwise to accept contracts which last into and beyond April 2000, where you have no rights to give notice to terminate earlier than that on notice
2. if you re-read this article on some later date, be aware that by then, the rules may have changed!

Oh - and the abbreviations I've used in this article (ETC, NETC, EP, NEP) are my own - so don't expect others to know what they mean.