IR35 detailed comment

The hypothetical Individual-Client contract - what is relevant?

The Company-Agency contract

Clearly this document is relevant and will need to be taken into account;  to the extent that it reflects and is consistent with the reality, it is reasonable to expect that its terms will be imported into the hypothetical Individual-Client contract, at least to the extent that it not contradicted in any material particular by the Client-Agency contract (see next paragraph).

The Client-Agency contract.

The Revenue will seek to say that it is relevant, and will seek support in this from Schedule 12 paragraph 1(4):

'(4) The circumstances referred to in sub-paragraph (1)(c) include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided.'[1]

From the Contractor's point of view however, it is difficult to see how the terms of a contract (1) to which he is not a party, (2) which are not legally binding on him, (3) which he has in all probability not seen, and (4) which he has no right to see, can reasonably be expected to affect his tax position - or how he can be expected to take a correct decision 'in the dark' on how to properly account for tax, if he is obliged to take those terms into account.

That may work both ways:  it may be that a material term in the Company-Agency contract which appears to directly affect the Client, and which is not itself reflected in the Agency-Client contract, will NOT become imported into the hypothetical Individual-Client relationship.

It may of course be arguable that the terms of the Client-Agency contract, to the extent that they differ from the Contractor-Agency contract, represent commercial risk and benefit accepted by the agency - and thus are not binding on the Contractor. 

Or it may be that in these circumstances, the view will be taken that the services are (for the purposes of this legislation) in fact provided to the agency, and not to the Client - or indeed to BOTH Agency and Client.

Thus the Client-Agency contract may have at least some relevance. 

In the PCG Judicial Review case [2], it appeared to be accepted that the agency-client contract could certainly be relevant;  it was also said that where the Revenue took it into account, a copy should be made available to the Contractor.

Equally, insofar as the inspector has access to something not available to the service contractor, such as the contract between the agency, which recruited him, and the client, which is or may be relevant, then it should clearly be supplied by the agency or the client or by the inspector. An answer simply by reference to the engagement itself, its length, and the terms of such written contract between the agency and the client cannot be acceptable if regarded as sufficient of itself.

A guidance note, ESM 1004, sets out what is apparently the Revenue's position in relation to such written contracts. There is reference to the fact that the Courts

"will not normally refer to evidence other than that of' the written contract (for example, they will not refer [to] what the parties did in practice)".

It concludes,

"Written contracts are therefore extremely important. When dealing with a written contract you should not try to go behind a written term unless you can clearly demonstrate [that] it does not reflect the true agreement between the parties".

It appears to me clear that the Revenue must bear in mind that under IR35 they are not considering an actual contract between the service company and the client, but imagining or constructing a notional contract which does not in fact exist.

In those circumstances, of course the terms of the contract between the agency and the client as a result of which the service contractor will be present at the site are important, as would be the terms of any contract between the service contractor and the agency.

But, particularly given the fact that, at any rate at present, a contract on standard terms may or may not be imposed by an agency, or may be applicable not by reference to a particular assignment, but on an ongoing basis, and may actually bear no relationship to the (non-contractual) interface between the client and the service contractor, such documents can only form a part, albeit obviously an important part, of the picture.

The reality of what happens - the actual relationship between Individual and Client

The reality of what actually happens between Client and Individual will certainly be relevant. 

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This page was last updated on 3^rd March 2001.

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