Project-based work and operating outside IR35

Adrian Marlowe of Lawspeed looks at an important IR35 issue.

When attempting to draft a contract that falls outside the scope of IR35 it is very important to look at the nature of the work and to structure the work in the form of a project. Lawspeed like many other advisors place significant importance on the work and therefore the contract being project-based if an engagement is fall outside the scope of IR35. This is for a number of reasons.

Mutuality of Obligations - a contract for a defined project removes any obligations to offer or perform further services both within and between contracts. Given that the work is specified there is no obligation to perform other work during the course of the contract and as the contractor is engaged for a specific purpose once this is completed there is no obligation to perform further work. The obligation to perform other work can be excluded in the contract as both an explicit and implicit term.

Control - a contract that is for a defined project removes elements of control as the contractor would not be told 'what' to do – it is defined and agreed in the contract. Even if the exact deliverables cannot be determined at the outset (and written into the contract) the project requirements should be broadly established and the ultimate objectives made clear. In addition it is unlikely that the contractor would be told 'how' to do the work, as it is for this expertise that he is hired.

Personal Services - a contract for completion of a defined project is a contract for services and is not based on the provision of a person. This also converges on the issue of substitution as the company is contracted to deliver the project not any one individual.

Basis of Payment – projects have budgets and these can be included in the contract to show a contemplative fixed sum even if the contract rate is calculated on a daily or hourly basis. The use of timesheets is also validated as necessary in order to keep track of the project budget.

Commercial Agreement – A correctly drafted project-based contract will closely resemble a proper commercial agreement and looks unlike an employment contract. This assists in establishing that the contractor is 'in business on their own account'.

Commercial Practice – Most self-employed professionals are engaged to perform certain tasks or pieces of work and structuring IT and engineering contracts in this way will assist to have these professionals recognised in the same manner as a lawyer taking on a case, an accountant agreeing to audit a set of accounts or an architect agreeing to design a building.

This importance of project-based contracts is supported by the opinion given to PCG by David Milne QC:

"Selling time-based contracts is dangerous ground to be on - you should be there to do a particular job and then get out. A fixed period contract to do whatever happens to turn up is a big danger."

Time-based contracts (ie fixed term) are more of a grey area than project-based contracts and are more difficult to structure outside IR35. This is not to say it is impossible but in our opinion you are fighting an uphill battle, especially if the contract is renewed. You are in a much stronger position if your contract is based on completion of defined tasks. These tasks should be written into the contract and even if it is a large project it can usually be broken down into stages or phases.

We have won every case that we have taken on for a contractor who has been deemed caught by the Revenue and a key argument in our favour in most of these cases has been the ability to define exactly what the contractor was doing and the fact that the requirement for the contractor's services was finite. There are trump cards (such as genuine substitution) that can be played to avoid IR35 but in general the starting point is to put in place a proper project-based contract.

Adrian Marlowe is Managing Director of Lawspeed, a niche legal consultancy specialising in IR35, contract and employment law for those operating in the in the IT and contracting industries. This article is for general guidance only and is not a substitute for professional advice where specific circumstances can be considered. Whereas the greatest of care is taken in providing this information, neither Adrian Marlowe nor Lawspeed can accept any liability for any action taken or not taken in reliance upon the information provided in this article.

May 11, 2004