Outside IR35 Contracts Advice
- There are many compliance pitfalls in the construction of contracts for engagements of workers outside IR35.
- There are often multiple contracts between several parties in a chain. Inconsistent treatments of clauses that impact off-payroll (IR35) status determination can jeopardise the validity of an outside IR35 determination.
- It is unlikely any of the contracting parties will have access to properly vet all contracts in the chain. You CAN consult with the next party in your chain and ask them questions about the content in contracts further back or along the chain that could have an impact on IR35 determination.
- There is one other substantial mitigation available to all parties, namely the Right of Substitution Declaration that we facilitate here on 34square, between the end client and the worker.
- The presence of an unfettered Right of Substitution along with the capability to robustly execute in line with HMRC stipulations, is a potentially sole contributor to an outside IR35 status determination, as supported by HMRC’s Check Employment Status for Tax (CEST) tool, and by numerous case law precedents.
- Your Right of Substitution Declaration and the substitution capabilities we provide for contractors, ensure the presence of that right and robust capability.
Why Should Contractors Concern Themselves?
- From April 2021, IR35 determinations will no longer be the responsibility of the contractor. It is up to the client to determine the IR35 status.
- In the event HMRC cannot establish absence of client reasonable care, but CAN establish the IR35 status should be inside, an unlikely but nevertheless not impossible scenario arises in which the tax and NI are still due from somewhere other than the client. In this case it is the fee payer / deemed employer, in many cases the recruitment agent, that is held liable.
- It is in the entire contractor and recruitment agent community’s best interests that there are absolutely NO high profile HMRC victories, in fact no victories at all against clients in IR35 disputes. Such an outcome would fuel the momentum of a drive away from outside IR35 in favour of umbrella companies and fixed term contracts, an outcome that would be damaging for the UK workforce, for medium and large UK companies, for the recruitment industry and for the UK economy.
- Contractors should therefore remain vigilant when it comes to the content of contracts and the true strength of any outside IR35 determination.
The Weight of Multiple Factors.
- One should not only consider risks associated with losing a tribunal against HMRC, but also the disruption, potential costs and loss of income associated with a tribunal even if HMRC loses.
- What that means is that it is important that contracts and working practices are as robust and compliant as they possibly can be.
- HMRC will take a risk-based approach when considering whether or not to raise any off-payroll (IR35) dispute. They could still therefore pursue a dispute having spotted only some minor weaknesses, with the intent to widen those cracks and find others during the process.
- The more pitfalls you avoid, and the more secure and robust your outside IR35 status can be rendered, the less likely you will be to face a tribunal.
- Right of Substitution is the single most powerful and yet the most innocuous factor in the mix. If this is weakened or absent, the criticality of other factors is exponentially inflated. Further, other factors are more open to interpretation and ambiguity. It therefore makes sense to ensure a robust, unfettered and feasible legal right of substitution is in place, even though it absolutely NEVER has to be used. 34square is as robust and feasible as it gets.
Right of Substitution.
- All parties should ensure right of substitution exists in the contract and do what they can to ensure it’s there in other contracts in the chain.
- Often there is a clause stating that an agent must approve a substitution. This is a major red flag and all parties, agents especially, should be aware that IR35 disputes have been lost on the basis of clauses of this nature that fetter the right of substitution.
- It is acceptable for a client to be able to validate the credentials / suitability of a substitute, but there must not be firm wording around a client right to outright reject substitutes with no reasonable grounds.
- There should be no references to the client or the agent needing to provide any kind of cover for the absence of a contractor.
- It should be noted that lines in contracts alone are insufficient to deliver a robust, unfettered. feasible right of substitution. Hence 34square.
Say No to ‘Office Holder’.
- Under no circumstances should contractors accept any inference in your contract that you would be or would be considered to be an Office Holder in the client company. This is a virtual guarantee of a HMRC interpretation of inside IR35. Having the word ‘Director’ in your title doesn’t necessarily mean that you are an office holder. A registered Director is an office holder. If you have director in your title, and are not an office holder in terms of HMRC’s definition, it still may attract attention to the nature of your duties and tip the scales firmly towards inside IR35.
So No to Employee Benefits.
- This rarely crops up, but if contract terms entitle the contractor to any company / corporate benefits in line with those awarded to employees, even gym membership or a subsidised canteen, contractors, in fact all parties, should aim to have this content removed.
- Contractors should avoid being granted a company credit card, company phone or other facilities that align them with employees.
- If it is feasible from the client’s and contractor’s perspective to use the contractor’s own laptop and other personal computing devices instead of being issued with client equipment, this is advisable. It is, however, by no means a significant contributor to inside IR35 determination if it is not feasible.
HMRC Penalties and Legal Costs Risks.
- Contractors should not accept clauses that ask them to indemnify the client or the agent against any tax / IR35 penalty risks or legal costs. These are not the legal responsibility of the contractor.
- Contractors should not accept any clause that aims to control or dictate how their own limited company pays them. This is the sole responsibility of the contractor in an outside IR35 engagement.
- Any references to the possibility of withholding tax and NI at source, either at the sole discretion of the fee payer or in any other context should not be entertained. If the contract is outside IR35, there is simply no scenario in which tax should be deducted at source.
Limited Company V Contractor Obligations.
- Some contracts have clauses that aim to cover the fee payer by transferring obligations and warranties to the contractor / worker in the event of the failure of the limited company to meet those obligations. This is a major red flag and such language should not be entertained.
References to ‘Role’ or ‘Duties’.
- Ideally a contract will not include language referring to a job role or about duties to be performed. Rather it should talk about deliverables, services and the provision of same.
Statements of Work.
- If possible, contractors should encourage the fee payer, and fee payers should seriously consider, utilising statements of work to describe specific deliverables required from the contractor’s limited company. On its own, this factor is not a substantial determinant of IR35 status, but it does help to characterise an engagement as one that is related to a definite delivery time period, rather than being characterised as an indefinite job role that could be interpreted as a disguised employee.