One clause, even a bunch, won’t save contractors from IR35

In a decision that is not on IR35 but that will impact future IR35 cases, the Supreme Court has upheld the Court of Appeal decision in Autoclenz v Belcher that a contract must be applied in practice for it to be valid, writes Martin Hesketh, managing director of Brookson, a contractor accountancy firm.

Delivering its decision in the case of Autoclenz Ltd v Belcher (and others which considered the employment status of 20 individual car valeters), the court re-established the importance of considering the working practices, as much as the terms of the contract. Whilst this is not an IR35 case, the decision is relevant to contractors as it binding on HM Revenue & Customs and the tax tribunals when deciding IR35 cases.

The decision relied on the working relationship of the parties and confirmed that if the written terms do not represent the true intentions, or expectations, of the parties, then they will be disregarded. To me, this seems to signify a move away from the strict interpretation of the contract, to a position in which the courts and tribunals view the practical reality of a relationship of equal or more importance. Whilst we have seen some moves in this direction in other cases, to have it confirmed by the Supreme Court binds all courts to follow suit.

In his judgment Lord Clarke cited the ruling of the original Tribunal, which found that the substitution clause contained within the contract did not reflect what was actually agreed between the parties, which was that the workers would show up each day and do the work, and that the appellant would offer work - provided that it was there for them to do. Substitution never actually happened in practice nor was it likely to.

Further, a clause which was introduced into the contract saying that there was no obligation on the appellant to offer work, or on the claimants to accept work, was also considered inconsistent by the requirement for the workers to give advance notice if they were unavailable to do the work. This indicates that there was an obligation to attend work unless a prior arrangement had been made.

This case demonstrates that it would be foolish to rely on the written terms of the contract alone and contractors, end clients and agencies alike, should ensure that contracts are kept up-to-date, so the documents accurately reflect the nature of the working relationship. Doing this will avoid any confusion as to how ‘genuine’ the contract terms are, should your employment status come under scrutiny in an IR35 review.

In addition, the court’s judgement serves a reminder that careful consideration should be taken when negotiating contract terms to ensure that what the parties agree accurately reflect the parties’ intentions, both at the beginning and throughout the relationship. It would be unwise to think that by simply inserting a clause into the contract, without ensuring it reflected the intention of all parties, it will save the day.

Friday 29th July 2011