There is some belief that it is sufficient to have a well written contract for a contract to be considered as “outside of” (“not caught by”) IR35, but the reality is that a well worded contract is not worth the paper it is written on unless the contract terms are supported by the working practices. Indeed, should HMRC undertake an enquiry, they will disregard the contract wording (if it favourable to your case) and go straight to the working practices, which, wherever possible, they will seek to confirm with the End Client.
This raises an important point alluded to in an earlier article. The contract between the Agency and the End Client may not necessarily mirror the one that your company has signed with the Agency (despite the best intentions of the Agency to do so) and cases have been lost where the End Client has denied the operation of clauses to which the contractor has signed up in good faith. There is nothing that can be done in these circumstances – the agency contract signed with the contractor’s limited company may well have a clause stating that it is not liable if the commercial reality of the contract is not borne out by the contract signed. This alone brings into sharp focus the importance of the engagement’s working practices.
Despite these comments, you are going to be on the back foot if the contract wording is unhelpful because HMRC will only be too pleased to demonstrate that the written documentation proves their case (you may be the one arguing that the contract wording is to be ignored and that the working practices should be considered!)
So to the issues:
From the previous copy, it is clear that we need to establish whether the End Client is controlling the work, or whether the Contractor has reasonable autonomy in the performance of the services. This will be determined by how, where, when and what is to be performed. It is unlikely that either party will fully control all of these, but if the contractor wants to be seen as being independent, they will need to have a strong degree of influence over most of these.
Often referred to as “Substitution”, this area of an engagement is about determining whether it is your company that has been engaged to provide the service, or whether it is you personally. It is about the right of a company to send a substitute, not whether actually one has been provided (although if they genuinely have, then it is difficult to see how IR35 could apply).
Mutuality of Obligation
Here the issue is whether the End Client (or the agency) is obliged to offer you more work and if it is offered whether you are obliged to accept it. If the answer to both of these is “No”, then there is no mutuality of obligation. Compare this with an employment contract where your employer must continue to pay you even if there is no work, or make you redundant and compensate you. Similarly, if you are asked to complete some work, you are obliged to do so (if you wish to be paid and retain your employment).
Where an engagement with a particular End client is continually extended, then it becomes harder to argue that there is no mutuality, although it is impossible to define mutuality as commencing by reference to a particular passage of time.
Financial Risk / Being in business on one’s own account
We have put these under one heading because many examples of financial risk stem from being in business on one’s own account and vice versa. Here are but a few:
- Marketing and training expenditure bring with them no guarantee of future business and yet are clearly investment in the business;
- The payment of various business overheads such as insurances and accountancy fees;
- The purchase of equipment and stationery.
None of these in isolation will tip the balance in favour of employment or self employment, but one can understand that where such expenditure is largely missing from a business that HMRC might not consider that the individual was truly in business on their own account.