On our blog earlier this month we discussed the effects of changes to the HMRC IR35 tax regulations on contractors and consultants following announcements in the Budget.
These changes to the HMRC IR35 rules will have an impact not just on contractors but also business owners too. Here we provide you with 10 rules (below in italics) relating to this area of tax law and outline some of the complexities for which you may wish to seek expert business legal advice.
In providing guidance as to what is a contractor / client relationship which is not subject to IR35 regulations it is very easy (as I discussed in my previous blog article) to take the description of a contract with an external supplier and apply it to a contractor.
In describing a contractor / client relationship which accurately depicts a relationship which is subject to IR35 regulations, it is not sufficient just to note the presence of certain indicators and, assume that the contractor is employed. This is because the ten rules relating to the tax position of an engaged consultant are themselves ambiguous:
1. Defined provision of services – the contractor should know exactly what work is entailed in the contract with the client. Each part of the service provided should be described in detail together with some expression of the desired outcome of the provision of the parts of service and the service as a whole.
So if a contractor is handed a job-description of a role detailing responsibilities, skills required and outcomes looked for which they will be expected to cover for a defined period and they go in and perform the role as described in the job-description, with no expectation of definite or indefinite extension beyond the term of the agreement, this could be seen as consistent with the definition of how services are to be provided depicted above.
2. Control – the contractor should not be told that they will be directed, supervised, or controlled by the customer or a representative of the customer. To avoid IR35, the primary focus should, if possible, be on the ends and not the means.
This boils down to a question of terminology – every supplier of a business is directed by the customer’s representative and in every business to business relationship one party ‘controls’ or is dominant in the relationship; this is most often the party which pays. The party which offers consideration for payment is, typically, expected to give the payor what it wants.
3. Substitution – the contractor should be permitted, as part of the contract, to allow someone else to complete work or parts of work in the contractor’s place.
Many, if not most contractors work independently. They do not, therefore, have employees, or agreements in place with other contractors to provide services in their place should they find themselves unable to proceed. These contractors are generally required to accept the risk of not being able to meet this contractual obligation and therefore breach their agreement(s) specifically in order to avoid the applicability of IR35 regulation.
4. Mutuality of obligation – any further work in addition to previous work done for the client should be covered by a separate contract and agreement. The contractor must not be obliged to do work for the client / agency and the client / agency must not feel obliged to offer the contractor any more work past what has been agreed in advance.
Contracts, which would otherwise fall outside IR35 regulations, run into issues here where a contractual engagement is extended and so, consultants need to ensure that any extension is clearly documented and signed by both parties as a new agreement on the terms of, or as amendments to the contract in place. Consultants should never sign a contract which does not include a term or agree to a term which exceeds two years.
5. Contract termination – the contract should be for a defined project and should end when that project has been completed to the client’s satisfaction. The contract covering the work should be based around a realistic, estimated timeframe in which the work can be completed.
Not all contracts which are absolutely time-limited or have clearly defined outcomes. Take many ‘agile’ software development contracts as an example: yes, there are milestones and outcomes which are broadly defined at the outset; but an agile process by definition evolves as it progresses and can easily extend in time. This is as true for service providers who are not contractors as for those who are and is not a reasonable indicator that an individual is employed.
6. Financial risk – a contractor should have some sort of professional indemnity insurance at the very minimum, and agree to remedial work when needed and when caused by something the contractor has or hasn’t done or has done completely wrong.
This is a true indicator of a contractor’s independence and should be something required by every client / recruitment business as an indicator of true independence. Contractors meanwhile should be careful to limit their company’s liability within or to the extent of the insurance on which they can rely.
7. Payment – the agreement on how the contractor is paid should look and feel like those that exist between companies and should not look and feel like a succession of pay-days. Clients should be billed by the hour, by the day, or by the project.
If a contractor was to be paid on delivery of the services then they would be asked to provide the entirety of the services OR deliverable milestones before being entitled to present an invoice in the same way that a web design / build business developing the services described as the contract on which ‘Alan’ might be engaged would. ‘Alan’ however, may bill monthly, which may appear to create a succession of pay-days (particularly if, as many intermediaries indicate in their contracts, acceptable invoices will be paid, in arrears, on or before a certain date each month).
8. Exclusivity – the contracting organisation should in no way impede the contractor from working for other companies when they like, even if a client is a competitor of the contracting organisation.
The obvious issue here is one of control as indicated above. Where the service provider is a company with staff then there might be a non-compete clause in the agreement. As mentioned, the contractor is typically an individual working alone and can’t be in two places at the same time. If therefore a client wants a certain number of hours / days a week to be spent on a contract / project then typically a contractor will accept that obligation and its relationships with other clients might therefore suffer unless the individual is willing to work extended hours.
9. Equipment and premises – ideally, the contractor should provide the equipment used on a job. The contractor should keep receipts for the equipment and demonstrate that they are in charge of upkeeping and maintaining their equipment.
In many fields (e.g. legal, HR, IT, marketing) there aren’t many contract roles which don’t require a contractor to work whilst connected to their client’s open server systems. As I have indicated, there are few clients who will provide access over a secure connection and so, for security and data protection reasons, most, if not all, require company equipment to be used and in many circumstances it is in the interests of consultants to comply. Perhaps a more appropriate measure would be the extent to which a consultant might use client equipment for personal use (indicating treatment of the client’s machine as ‘theirs’ and, acting with it as might an employee) and the extent to which a contractor might need to modify their own premises (home office) to accommodate the use of client equipment … which is more often the case.
10. Intention – the contract should show that the contractor and the contracting organisations are separate and that there is no employer-employee relationship.
There should be a clause to this effect in every contract for an arms-length, contractual engagement which is not subject to IR35 regulation.
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