Contractors' Questions: How does IR35's first split case affect me?

Contractor’s Question: Apart from the latest minutes of the IR35 Forum, I haven’t heard much about IR35 of late, so was surprised to see the ruling in the JLJ Services case. What are the implications of the judgement for IT contractors? I notice for example that the presence of a substitution clause in John Spencer’s contract failed to advance his argument for self-employment. How, if at all, does the ruling change the conventional wisdom on how contractors navigate IR35?

Expert’s Answer: Clearly IR35 is alive and must be considered by all contractors on all assignments they undertake for the whole duration. Undertaking an IR35 review of your contract at the outset of an assignment is vital. However we also believe it doesn’t end there, as this case proved.

So we recommend considering the application of IR35 continuously throughout the assignment and, ideally, at least at 6-month intervals to avoid changes to the assignment falling foul of the IR35 legislation, as contractors become comfortable with clients and risk being deemed ‘part of the furniture,’ as Mr Spencer was in this case.

This is important for contractors to consider because the Bristol Tax Tribunal highlighted the importance of having a contract in place which accurately reflects the contractor’s working practices. Therefore where a contract is continually extended, each contract extension should reflect this and, in particular, the description of the project should be detailed to help negate any argument that the client has complete control over the work that is carried out.

Contractors are often caught out by contracts which are correct at the start of the relationship, but fail to keep them up to date with changes during the assignment which can prove fatal, as highlighted in this case.

It is also important to ensure that the terms of the contract in place between the parties are workable in practice. Having a right of substitution in the contract is great, but it needs to be able to happen in practice otherwise the clause in the contract is worthless. If such a clause is not reflected in the upper level contract, or is not agreed with the client, the clause may effectively fall foul of this judgment and be considered a sham.

The expert was Martin Hesketh, managing director of Brookson, a contractor accountancy firm.

Thursday 15th December 2011