Contractors' Questions: Is client Christmas party a red flag under IR35?

Contractor’s Question: Does attending my client company’s Christmas party, where client staff will be, have any bearing on my IR35 status?

Expert’s Answer:  A very timely question and one which at first sight seems pretty straight forward to answer. But is the question as straightforward as it might first appear?

At the heart of the matter is IR35 status and the question - will attending your client’s Christmas party undermine your status as an independent contractor?  We should all now be fairly familiar with HM Revenue & Customs published guidelines and also of their reliance on internal Guidance Manuals when approaching IR35.  However, IR35 status cases are ultimately determined by the courts, and HMRC’s track record there is not quite as convincing as they would like to have us believe.

There have been a number of well known test cases that have determined (and remain the ultimate guiding factors until the law is changed) that where it can be shown that at least one of the three main indicators of self employment are present, then there cannot be a contract of employment - and by inference, the contract must be outside of IR35 – in other words, not caught by IR35.  These three critical factors/tests are:

  1. Control
  2. The right of substitution
  3. Mutuality of obligation (or the expectation that an employer will offer work and an expectation that such work will be accepted)

If only one of these three indicators can be proven favourably, then the contract will defeat an IR35 inquiry, no matter how many Christmas parties are attended!

However, where there is no clear and irrefutable evidence to favourably prove any one of these three tests, then the courts will look to other less important aspects of the contract and at the behavioural aspects of the engagement. Such as, does the contractor take financial risk; responsibility for the quality of the work undertaken, have other clients, take out insurance cover, have a website, etc, etc.?

I would put attending your client’s Christmas party very low on the list of pointers towards employment and being caught by IR35, and so my advice is to accept the invitation. After all, shouldn’t a genuinely independent business maintain good working relationships with its clients, who, it may be argued, may be offended by your absence at the party? Enjoy the bash and have a happy Christmas!

The expert was Barry Roback, managing director of Privilege Accounts, an accountancy firm serving contract and freelance professionals.

Friday 21st December 2012