Why many IR35 contract reviews just got more worthless

The recent Supreme Court case of Autoclenz v Belcher does not affect how IR35 is decided, but does serve as a warning to anyone simply relying on a review of the written contract terms to decide their IR35 status, writes Kate Cottrell, co-founder of employment status specialist Bauer & Cottrell.

Working practices

The IR35 legislation requires the construction of a hypothetical contract between the individual contractor and the end client.  The IR35 cases that have gone before the Commissioners and the Courts have, for many years, required consideration of all the contracts in the chain and most importantly consideration of the reality of the relationship between the individual and the end client, the working practices.  

“IR35 friendly” clauses

Having a contract containing IR35-friendly clauses such as substitution, lack of control, lack of mutuality of obligation, among others, do not equate to an outside IR35 engagement unless this is the view of the end client and they reflect the reality of the relationship. 

Many IR35 Contract Reviews are worthless

A Contract Review that does not also look in detail at the working practices is not worth the paper it is written on, and can leave contractors unknowingly exposed to significant tax and National Insurance liabilities and penalties, which stem simply from receiving bad and inaccurate advice.  

I recently reviewed an agency contract that had been written to strongly suggest that IR35 did not apply to the relevant engagement.  The role was titled “Project Manager”.  The reality was that there was a project, which was the relocation of a company.  The contractor was in fact packing the boxes and felt that he was not subject to control because it was down to him when he called the removal van.  The end client viewed him as an agency temp subject to very significant control.  This is an extreme case but does illustrate the problem. 

Contract changes

Where reviews only look at the written contract, then simply adding IR35 friendly clauses will not make the engagement outside IR35.  Where agencies are involved, contractors need to try and establish what the agency’s contract with the client contains.  You should ask them if they are changing this as well to reflect the changes made to your contract.  Many of the agencies we deal with will seek the end-client’s agreement to changes first, which is excellent evidence of the end-client’s view of the relationship. 

Wrong terminology

Sadly, every week Bauer & Cottrell also sees contracts between say the “Agency” and the “Contractor” with all clauses referring to these two parties.  And often the very important substitution clause uses the terminology the “Company” and the “Supplier,” showing that the clause has been added more as an afterthought without any consideration for the defined terminology and is shouting that the clause is a sham.

A good independent IR35 Contract Review includes:

  • Completion of a questionnaire to pick up the working practices
  • Discussions between the reviewer and the contractor to clarify points
  • A review of all the documents provided with the contract, including schedules, codes of practice, self-billing arrangements, confidentiality requirements etc.  Ideally where there is a job specification, written by the client, this too should be reviewed.
  • Any changes needed should be negotiated with the backing of in-depth knowledge of case law precedent.  Note, most accountants do not negotiate changes because of implications under the Managed Service Company legislation

You can read further information on IR35 Contract Reviews here

Thursday 11th August 2011