Offset the IR35 risk of long-term IT contracts

IT contractors fighting to win contracts running for three years should bear in mind that the rules relating to IR35 are the same whatever the length of engagement. Their focus will naturally be on winning the contract, but there may be a price to pay since in the struggle to get the award the contractor's negotiating position regarding IR35 is likely to be compromised.

It is now well known that to operate outside IR35 there should be a "project". This has always been our position and all the IR35 cases now substantiate that position. However where the contract is focussed on a time and/or materials basis, particularly for a period as long as 3 years, it is often difficult to establish a project. Added to that when the contractor is in a weak negotiating position (in order to win the contract), the ideal of having a project which is set out in a well defined way in an appropriate contract, can sometimes be beyond reach.

My advice therefore would be to emphasise from the outset of negotiations the credentials of the contractors business as a specialist set up to deliver results in relation to identified projects rather than simply a time and materials supplier. Break the 3-year period up into chunks of specified work and organise a 3-year retainer on appropriate terms. If that is done and the work is properly organised to reflect the arrangements I have described the contractor should be able to operate outside IR35. We would be happy to help anyone wishing to organise things properly in this way - a fair amount is involved to ensure that the right level of tax is paid.

Specifically what a contractor should not do is simply sign any old contract, whether IR35-friendly or otherwise, and perhaps rely upon devices such as substitution clauses. For years it was put about by some advisers (not ourselves) that substitution clauses could save the day. Categorically I can say that in most circumstances they cannot.

To summarise, the contractor should decide whether he/she is a serious project-driven contractor, which may impose strains on negotiations with the recruitment company, or hirer, but which should win the day so far as IR35 is concerned, or a time and materials supplier (which in the absence of defined projects the contractor will probably be regarded as over such a long period). Most will agree that it is better to win the contract rather than let the tax position get in the way. If you can achieve both then that would be the goal, which we can help achieve, but in today's market with a shortage of work that may be hard to attain.

Adrian Marlowe is the managing director of Lawspeed Limited , a business and legal advisory for recruitment agencies and IT contractors.

Tuesday 10th Feb 2009