Contractors, fortunately contract length is still no real indication of IR35 scope
There are a myriad of issues which can impact HMRC’s view as to whether a contract falls inside or outside IR35, and there remains much uncertainty around the length of contract, writes off-payroll adviser Paul Mason, head of tax partnerships at Markel Tax.
There are concerns that if the contract period is lengthy, it lends itself to a view from HMRC that the contractor is effectively an employee.
No automatic IR35 capture due to duration
The good news for many contractors is that, in so far as the law is concerned, there is no period of time, or length of engagement, where a contract is automatically classed as inside the legislation -- regardless of how long it has lasted. That’s true of the rules introduced in 2000, and the revisions to those rules introduced in April 2017 and April 2021.
However HMRC will often view that the longer an engagement is, the more likely it is to create an employment relationship, as it is suggested that the length of contract means the contractor and client have developed ongoing commitments and obligations to each other over time. This is referred to by the courts as Mutuality of Obligations (MoO).
Case law dealing with MoO is hard to navigate but is helpful in understanding the IR35 rules.
Mutuality asks whether a client is obliged to provide work to a contractor, and whether a contractor is obliged to undertake work. In an employment scenario, an employee is contractually obliged to provide their service, usually for a specific number of hours a week. In turn, the employer is obliged to provide continuous work to the employee and pay them. So, it follows that the opposite is true for an independent contractor.
What HMRC says, only sometimes with success
HMRC’s Employment Status Manual states: “Where work is regularly offered and accepted over a period of time a continuous contract of employment may be created.”
A number of high-profile cases point to HMRC’s approach. What is clear is that HMRC has not enjoyed anywhere near a 100% success rate when cases go before a court.
The August 2020 Upper Tier Tribunal (UTT) case of the talkSPORT presenter Paul Hawksbee has been commented on as supporting HMRC’s view on Mutuality. In the case, the presenter had been at the station for over 18 years. Mr Hawksbee won his case in the First Tier Tribunal, but this decision was overturned by the Upper Tier Tribunal.
While the UTT did conclude that mutuality of obligations existed in this case, it’s important to note that this conclusion was not directly linked to the length of the engagement. What was fundamental here was the singular fact that an obligation of providing work and undertaken work was found to exist. More importantly, perhaps, there was also nothing in the written terms which demonstrated a lack of mutuality of obligations or either of the other key tests (a lack of personal service and lack of control).
Other IR35 case law like Parade Park is further proof
In short, the issue that was determinative can be summarised by the question; ’What terms and conditions did the contract contain, and did it contain mutuality of obligations?.’
Perhaps the most succinct judgement which confirms the importance of this laser-like focus on the contract’s contents, and whether those contents include MoO (and not how long those contents were in place for), is the case of Parade Park.
So, seeming to underline that contract length is no real indication of IR35’s scope, the judge in the case stated: “The longevity of the arrangement is not a definitive indication of employment; it is possible for an independent contract to be engaged over a long period without his or her status being changed by the length of the engagement.”
Case law points to the fact that there is nothing that prohibits a contractor from working outside IR35 for the same client for several years -- if not decades. What is important is establishing what terms and conditions exist within the period of the contract.
The Revenue is likely to retain its suspicion of long contracts
That said, we expect HMRC to continue to use the length of contract, or the use of rolling contracts, as part of any effort to prove that a relationship falls within IR35. As such, it is imperative a contract explicitly evidences that the key tests of IR35 are not present and this position is re-affirmed on a regular basis.
Our best practice advice is that contractors and clients undertake to review and re-affirm their contracts every six-to-12 months. This strategy will go a long way to supporting a contractor’s efforts to build a clear argument that they are not engaged on an employed basis by a client.
Lastly, reach out…
If in any doubt, contractors need to seek professional advice as to how the contract should be worded and which clauses are needed to evidence a contract remains clearly outside IR35. If the contract is explicit that the relationship falls outside the scope of the legislation the length of the contract is not, and will not be, a material issue.