IR35 - Who is the client?

Adrian Marlowe, MD of Lawspeed looks at engagements under IR35 and asks who is the client?

Whilst we await the outcome of the Judicial Review, the end of the tax year is approaching and it would be unwise to presume that IR35 will disappear. With this in mind it is important to determine if engagements will be deemed caught by the legislation and in order to do this the terms used must be clearly understood. In a situation where there are several parties involved then the party for whom the work is undertaken ("the client") may not be immediately clear. Neither the Finance Act 2000 (FA 2000) nor the Welfare Reform and Pensions Act 1999 (WRPA 1999) define the word "client", but is that necessary? Apparently there is still a degree of uncertainty as to who is to be regarded as "the client" for the purposes of the legislation.

Where an agency is involved, the assumption of any reasonable contractor would be that in simple terms he/she is contracted by their personal service company ("PSC") through an agency to provide services to a client, for clarity we shall call this company the customer (see figure 1), and it is this company who is the "client". Why? Because the usual process is that the customer approaches the agency with a work requirement, the agency identifies a suitable worker, the worker is interviewed by the customer, the schedule of work is provided by the customer, and the work is often performed at the customer's site using at least some materials or equipment of the customer. Further, the terms are usually recorded in an agreement provided by the agency that contains:

  1. a clause indicating that the services are to be performed "for the purposes of a business carried on by another person ("the client")", that person being the customer.
  2. a name or definition of "the client", who is the customer receiving the benefit of the work,
  3. a clause stating that the contract between the agency and the PSC is reliant upon the contract between the customer and the agency remaining in existence therefore the arrangement is reliant upon another contract
  4. in many cases a requirement for the worker to sign a confidentiality agreement with the customer.

The role of the agency is to "supply" workers to customers, and that is clearly understood by all in the chain.

So, most people would be in no doubt as to who is the "client". However, it is the domain of lawyers, and ultimately the Courts, to interpret legislation and determine if the party generally accepted as being the client, is in fact the "client". Following submissions by lawyers for both sides the Court would determine on the balance of probabilities, which party shall be regarded as the "client" in a particular set of circumstances. So let's apply the issues to the legislation. The arrangements to be considered are those between a worker and a client in the hypothetical situation that the arrangements are made direct between those parties. To understand the impact it is necessary to look at the terms used in the legislation and then break them down into meaning.

Paragraph.1 Schedule 12 of the FA 2000 states as follows:

"This Schedule applies where an individual ("the worker") personally performs or is under an obligation personally to perform services for the purposes of a business carried on by another person ("the client"), the services are not provided under a contract directly between the client and the worker but under arrangements involving a third party ("the intermediary"), and the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client."

Take a typical arrangement where an agency agrees to supply a worker with a specific skillset to a customer, and then supplies a suitable worker, who is operating through a PSC. In addition to the written or oral contract between the worker and the PSC (Contract 1), two contracts are brought into being at this stage, one between the agency and the PSC (Contract 2) and the other between the agency and it's customer (Contract 3). With few exceptions the contract between the agency and its customer is one in which the agency's obligation is to supply the worker not to be primarily responsible for performing the work.

Argument for

The business between the agency and the PSC is that work will be performed by the PSC for the benefit of the agency's customer. At this stage there is no doubt that, by entering into Contract 2, regardless of the terms of that contract, the PSC is agreeing to perform " for the purposes of a business carried on by another person ("the client")", namely the agency. Thus there is a correct argument that the agency is the "client" of the PSC because "another person" is the agency, defined in brackets as "the Client" (see the wording above). It would follow that

  • the arrangement to be considered is the contract between PSC and agency, Contract 2, and
  • therefore the Revenue has no entitlement to review Contract 3.

In short the terms of Contract 3 are irrelevant for the purposes of IR35 and if Contract 2 between PSC and agency is carefully devised to avoid any terms which could be regarded as indicative of an employment arrangement then the contractor is able to avoid IR35. Everyone can go home and count their money.

Figure 1

Worker (contract 1) > PSC (contract 2) > Agency ? (Contract 3) > Customer ? (contract 4) > End user ?

Argument against

First, the FA 2000 states that in order for the legislation to apply "the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party ("the intermediary")". There is no doubt that the arrangements between the agency and the worker will involve the intermediary (the PSC), as will the arrangements between the customer and the worker. The Act does not state that the PSC must be a primary party to each contract. Therefore the agency/customer contract does form part of the arrangements between the worker and the client involving the PSC.

Second, the FA 2000 states that the circumstances "include the terms on which the services are provided, having regard to the terms of the contracts [plural] forming part of the arrangements under which the services are provided". This indicates that there may be multiple contracts to consider, and that all of the terms upon which the services are provided should be taken into account. Additionally the statement is not exclusive, so in the context of IR35 the circumstances can only mean just that, all of the circumstances.

Third, simply because the agency can be regarded as "the client" does not mean that it is exclusively "the client". Quite the contrary. On any analysis the operations of the customer qualifies as a business carried on by another person. Therefore immediately it can be seen that the customer, is capable of being classified as the client. It is arguable that the words 'for the purposes of a business carried on by another person' equate to 'on behalf of a business carried on by another person' and one could argue that the services are performed on behalf the agency for the customer. This argument falls down, as it is the customer who originates the relationship with a requirement for work to be performed for the purposes of their business. Furthermore, since the arrangement between agency and its customer is usually one of supply and not performance of the work required, there can be no doubt that the other party to the arrangements, the PSC, is the party undertaking the work. The customer clearly benefits from the work performed by the PSC so the services are therefore undeniably for the purposes of a business carried on by the customer.

Fourth, common sense and the understanding of the parties to the transaction, as set out in the second paragraph above, will usually identify who is the "client". The Oxford English dictionary definition of the word "client" means "a person using the services of a professional person or organisation". The agency, the customer of the agency and in some cases an additional end user (see Contract 4) are all using the services of the PSC or the worker and are all capable of being regarded as the "client" for the purposes of IR35. If the arrangements are as indicated then if the written contract states otherwise it is open to being regarded as a sham.

Although in standard employment status cases there are legal precedents that would limit the courts to looking at the written contract to which the PSC is party, the IR35 legislation allows a broader power. Under the FA 2000 the application of employment case law will only be relevant after determining the circumstances to which the Act shall apply. The question we have here is not the application of employment law, but to which particular circumstances does IR35 apply. For the reasons given it does apply and therefore the Revenue is entitled to look at the contract between the worker and the PSC, the contract between the PSC and the agency and the contract between the agency and the customer plus any additional written terms such as timesheets or the actual working practices, as clearly intended by Parliament and those drafting the legislation.


The customer of the agency is capable of being the Client. The Revenue can therefore call for a copy of the contract between agency and Client. To suggest otherwise is dangerous - anyone who practises litigation will know that there is always a risk of losing and that the arguments have to be weighed carefully before advising on a particular course of action. For the argument to succeed that the agency is the only "client" (that is the argument which supports the contention that the Revenue is not entitled to consider the agency/client contract) the contractor would have to prove that the customer of the agent is not in fact a "client" for the purposes of the Act. Given the arguments available to the Inland Revenue, there must be serious doubt that the contractor would succeed. A finding of the Court in favour of the Revenue, which confirms that the agency is not the only "client", would affect every person who has relied on contrary advice. The Revenue could be looking forward to proving this point and catching out the unwary contractor. Case law is overridden by statute.

Finally, Gerald Barling QC, in presenting the case of the PCG under the current IR35 Judicial Review on 13th March 2001, is quoted as saying "a contractor's tax status under IR35 can be determined by a contract to which he/she is neither party nor privy ... the uncertainty engendered by this is very significant...particularly in terms of the risk and potential costs to the contractor....". The reference to a contract to which the contractor is not privy was reference to the agency/client back to back contract. Status is determined by reference to all of the arrangements and contracts in the chain. The judge, his Lordship Burton J, later considered this point and commented that "if a conclusion is to be drawn about employment status by the Revenue which relies in part on the Client/Agency contract, then quite plainly the contractor has the right to see that contract." I, for one, do not disagree with this eminent QC or the opinions of this High Court judge.

Adrian Marlowe

Adrian Marlowe is Managing Director of Lawspeed. Adrian practised as a Solicitor for almost twenty years before forming Lawspeed, a niche legal consultancy specialising in contract and employment law in the IT and recruitment industries. Contact


This article is for general information only and is not a substitute for professional advice where specific circumstances can be considered and neither the author or Lawspeed accept any liability for any action taken or not taken in reliance upon the general information provided in this article.
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