IR35: Working practices and contract wording
Article provided by Lawspeed.
A huge amount has already been written about IR35 to help contractors and their advisors understand the issues. However it is important that contractors beware of 'quick-fix' solutions to IR35, particularly with regard to the drafting of contractual terms and conditions. The nature of, and method of providing, the work being undertaken is of crucial relevance. It is wrong to solely focus upon what the contract states.
For example, there can easily be an obligation to provide personal services in practice even though the contract states otherwise or is silent on the point, or contains a right to substitute which is unrealistic. Given the complexity of the work often being undertaken by contractors and the security required by many clients, to insert an entirely unfettered substitution clause may be interpreted as a sham. Where work is being performed on a client site, there would at least be on-site security procedures to be followed before a substitute can be cleared to enter client premises. In any event, there is a minimum fetter that the proposed substitute has the expected skills, qualifications and expertise to perform the work to the same standard. Also important, particularly if an agency is involved, is that the Client is aware of and agrees to the right. In the absence of that written agreement, likely to be encountered in a back to back scenario, it becomes arguable by the Revenue that the right cannot have been agreed as part of the circumstances of the arrangement, and therefore can have no effect.
Merely inserting a clause stating that the client shall not control, or have a right to control as to 'how' the services are provided does not irrefutably remove any actual control by the client to the point where there can be no deemed employment. Lawspeed cannot tell me how to do my job anymore than a client can tell a programmer how to programme. Yet I am employed by Lawspeed. It should also be remembered that control over 'how' the work is done is only one aspect of control, and is of less importance as a determinant of employment status when the contractor is a specialist in his field of work – see Morren v Swinton and Pendlebury Borough Council (1965) IWLR 576. The other aspects of control relate to 'what' work is done, 'where' it is done, and 'when' it is done, and are also relevant.
Mutuality of obligations
Similarly a contract that states that there is no mutuality of obligations is certainly helpful, but only if in practice there is no mutuality of obligations and the contract properly deals with obligations during its continuation. It is important to deal with mutuality of obligations between engagements and within a contract. For IR35 purposes if there is mutuality of obligation within the term of the contract, i.e. not in the future when the contract ends, there could be deemed employment as under any fixed term contract of employment. For this reason, for there to be no mutuality of obligation, the work agreed to be performed must be identified at the outset, and the client should not have any right to request different work, or there be any obligation to perform different work within the contract term. Many of the clauses being suggested by various IR35 information sources and service providers do not deal with this important distinction. Also if in practice the Client does offer work and the contractor performs it within the terms of the existing contract, there could be mutuality regardless of what the contract states if other provisions in the contract indicate that it is not reflective of the actual working arrangement.
Some advisors have taken the view that the contract determines the status of the worker, but under IR35 it is all the circumstances of the arrangements, including the working practices, that are relevant. The strongest evidential source for demonstrating the actual working practices will usually be a written agreement between the relevant parties, but only if this can reasonably be relied upon as an accurate representation of the facts. The principal concern of contractors and their advisors should be to ensure that the contract reflects the actual working circumstances, not the other way round, and that it represents a proper commercial arrangement. Otherwise the Revenue may regard the contract as a sham.
James May LLB Hons Manager, Contractor Services at Lawspeed Limited, experts in IR35, contract, recruitment and employment law. For advice on all aspects of contracts including commercial terms and IR35 status call 01273 236236 or visit Lawspeed for further details.