Contractors' Questions: Can a 2-week gap beat IR35?

Contractor's Question: I am currently an employee but have decided I want to work freelance. My current employer has agreed. At present, I am seconded out, but my employer will benefit more than if I just leave. I think I need to use a framework supplier to stay in my role, and my plan is to become a sub-consultant with the current employer. How do I achieve this and avoid any consequences under IR35? My employer has suggested the best way to do this is to work out my notice and then take a 2-week break, before returning to the company to start work as a sub-consultant, direct to the client. Will this 'gap' effectively preclude me from IR35?

Expert's Answer: It is not clear if you plan to go freelance, by which you will be a self-employed sole trader, or if you plan to set up a limited company. The term "sub-consultant" does not help nor does the reference to "framework supplier". Your circumstances appear to be a so-called 'Friday to Monday' (employee on Friday - Limited Company supplier on Monday) scenario, which was the main reason for the introduction of IR35 by HM Revenue & Customs in the first place.

It is perfectly possible to agree totally different terms and conditions with an engager so that the status changes, but I would advise extreme caution in this case for a number of reasons.

Firstly, I note that the role will be the same, so it follows that the terms and conditions and the working practices will be the same or similar. Although it is likely that there will be no 'employee-type' benefits, it may be difficult to show other employment status issues, such as substitution or control, being any different.

HMRC would be likely to take the view that you are standing in the shoes of an employee and therefore deem you to be a disguised employee under IR35. Despite what your employer says, a gap of two weeks does not change anything, as it is a fact that there was an employment relationship.

I note too that the actual role is seconded to another user, so if a limited company is formed then it may be the case that it is this end-user that is the client for IR35 purposes. This means that any agreement reached with the current employer may be worthless in the event HMRC investigates.

Finally, if you are planning to do this as a self-employed sole trader then because the role is seconded out, the current employer could be found to be acting as an agency for tax/NIC purposes (and all sorts of other legislation and regulation) and would then be liable to deduct tax/NIC. All in all what you, and your employer, are proposing looks simple but there are lots of potential pitfalls for all the parties to the engagement. I therefore recommend seeking specialist advice, which can only be effective in your scenario if it is given once the actual working practices have been established. At that stage, and even at this one, you should speak directly to a specialist because of the complexities of your circumstances.

The expert was Kate Cottrell, of IR35 advisers Bauer & Cottrell.

Tuesday 30th Mar 2010
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