How a confirmation letter can help beat IR35

A question that many IT contractors often ask us is whether using a confirmation letter has any benefit in the event of an IR35 investigation, writes Neeta Vaitha, employment status specialist at Accountax Consulting. Understandably, contractors often pose a follow-up too: “Or, does using a confirmatory letter merely add to the paperwork burden that I could do without?!”

What a confirmatory letter isn’t

Let’s take a typical scenario: a contractor will have an engagement with their client for the provision of services. The contractor will have a separate engagement with the sub-contractor under which the sub-contractor will perform services for the end client. It remains important to have contracts in place which formalise the contractual relationships that exist. A confirmatory letter does not replace this.

What a confirmatory letter is

Although a contractual relationship between the sub-contractor and end client does not exist, it will be the sub-contractor who actually performs the required services. A confirmatory letter does exactly what it says on the tin. It fills a gap which exists, and affirms the conditions under which services will be performed, clearly demonstrating the intentions of both parties.

The taxman’s ‘sham’ attack  

HM Revenue & Customs has recently argued that the contract between the sub-contractor and contractor does not correctly reflect the reality of the relationship, and therefore considers the contract a sham. HMRC has made this argument on many occasions.

But where a contract is in place, demonstrating that services are being provided under a contract for services, in addition to a confirmatory letter stating the same being in place; it can assist to deter HMRC from taking the sham argument.

Not just for contractors

Some end clients will have faced situations where a self-employed sub-contractor has claimed employment rights. Again, a confirmatory letter which is supplemental to a contract assists to clarify the reality of the relationship, where in doubt.

While the advantage is that a confirmatory letter can assist to reaffirm that the sub-contractor is not an employee, it can also assist a sub-contractor with a claim or HMRC as a defence to demonstrate that the sub-contractor is an employee.

What’s in a confirmatory letter?

The content of the confirmatory letter remains important. In most cases, the argument from HMRC will be that the sub-contractor is not self-employed. The content of the confirmatory letter should clearly demonstrate the position in detail, focusing on key areas that determine status.

Pros &cons

It is therefore important that the confirmatory letter is clear and addresses the fundamental areas which determine status. But it is as a result of this focus that there is a risk that the end client will not agree to the statement of facts included within the confirmatory letter. This could open a can of worms, in regard to the contractual agreement between the client and the contractor.

Still, the advantages of using a confirmatory letter – also known as a confirmation letter, are clear:

1)     It assists in highlighting  veracity of the contract

2)     Assists in showing that the sub-contractor was aware of the terms of the contract

3)     Highlights an open and transparent procedure

4)     Allows you to highlight the main terms of the contract

The disadvantages that you need to consider are:

1)     It adds nothing to the contract

2)     If the contract is under scrutiny, the letter will also be scrutinised

3)     Any deviations will hurt the contract

Remember…

Status is an extremely complex area. It is very difficult to be able to provide guidance using a one-size-fits-all approach. That’s why a specialist provider in this area is recommended for contractors who want professional guidance specific to their individual circumstances.

 

 

 

 

 

Wednesday 7th September 2011