IR35 reform kicker (3): Notice periods and outside IR35: the inconvenient truth

Among the many complexities of IR35, there’s one in particular that has been a source of heated online debate in recent weeks -- notice periods, writes Nigel Nordone, head of tax at Qdos.

What is a notice period?

It’s understandable that a seemingly small detail would cause such confusion. Typically a single provision in an employment contract, notice periods offer businesses and employees a reciprocal level of protection from an immediate end to the working relationship.

That means the inclusion of contractual notice periods in ‘outside IR35’ roles can raise eyebrows; is a role genuinely outside IR35 if the contract and working practices contain indicators of employment?

No single IR35 factor is solely determinative

The truth is that many factors will contribute to an inside or outside IR35 determination.

As a result, notice periods in contracts could well have a bearing on your IR35 status. And with HMRC ramping up compliance activity, even the smallest areas of uncertainty become potential risk blind spots.

Debate and discussion

Online, there have been accounts of businesses terminating contracts without serving the contractual notice period because “there is no work left” for the contractor to do.

On LinkedIn, one individual suggested this is simply the result of “poor contract management” by end-clients. Another suggested that outside IR35 roles are typically “deliverables-based” contracts, and just don’t require a notice period.

Questions and assertions

But others looked a little deeper – at what HMRC might infer from the existence of a notice period.

“I would not expect any sort of notice period on either side”,  began one commenter. “You are not a member of staff, so why would you want any of the attributes that might make you look like one, in case the work dries up or something happens to end the project prematurely?”

Another person honed in on the precise issue with notice periods, though: “HMRC sees notice periods as being indicative of employment. However, reasonable notice periods are considered defendable”.

The trap

This is the crux of the issue in my view. True, notice periods are a convention in business-to-business arrangements.

But they may also suggest an employment relationship -- especially if they fall into the trap of looking like employment notice periods. 

How HMRC looks at notice periods and IR35

As is often the case with IR35, there’s no fixed way that HMRC would interpret notice periods in relation to status. 

It’s unlikely that the existence of a notice period itself would make your engagement one of employment rather than a business relationship.

That inconvenient truth said (and it’s inconvenient because wouldn’t we all like an easy answer so we can have certainty), here are some things you can do to minimise the IR35 risk of your notice period getting stuck in HMRC’s craw.

Three top IR35 tips for notice periods

1. The shorter, the better – think two weeks

Understandably, a client may want to include a notice period in a contract.

It offers an additional layer of protection; a bit of a buffer in the event they need to find an alternative contractor to complete their project, for whatever reason. And as a contractor, you might want the security of a notice period, too. 

In these instances, keeping notice periods as short as possible is the safest route.

One or two weeks would be where you would want to fix it; enough time for the client to find an alternative service provider, and enough time for you to start seeking other work.

2. 30 days or less

Sometimes, clients might specify longer notice periods – two or three weeks, say – where both parties are amenable to it. 

But longer notice periods are where the risk starts to creep in.

Anything over a month – the typical notice period for permanent employees – may imply that a Mutuality of Obligation exists between the parties.

This could be viewed by HMRC as indicative of employment, particularly when compared to the statutory and contractual notice periods of permanent employees.

3. No notice period is ideal

Depending on the clients you’re working with, and the industry you’re in, you may not have much of a say over notice periods.

But IR35-related concerns over them are valid, and it’s worth having the conversation with your engager.

They may understand – and perhaps even share – your concerns and reasoning.

After all, depending on their size, they may be liable for an incorrect determination where working practices and contractual arrangements don’t align.