IR35 and advisers. By Nichola Ross Martin

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The IR35-proof contract is dead. Long live the IR35-proof contract...

The combination of HMRCs new tax penalty regime and its victory in the recent case Dragonfly Consultancy Limited v The Commissioners for Her Majesty and Revenue & Customs 2008 EWHC 2113(Ch) ensure that IR35 is alive and well.

I know that many advisers have managed to avoid taking too close a look at their contractor clients affairs preferring to kid themselves that IR35 proof contracts do really exist. Providing you take your clients word as to the nature of the working contract which ultimately dictates their tax affairs, then your job appears to be done, for you the adviser, well, all bar the filing of a tax return, at least. Or not?


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Thank you Rebecca and Nichola for giving some credibility to my opinions. I always try to argue with logic and facts, but I do admit I get a little passionate about the issues sometimes.

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I agree - it is odd that a contract which sets out clearly the relationship between the parties is ignored in these cases, but the law provides that a "notional" relationship between end user and client is imputed - so this gives a lever to look at the underlying relationship on the ground. I will add that the Employment Status Manual has for many years (including pre IR35) encouraged status inspectors to "look behind the contract" at the reality. To be fair I guess this is what would be needed to protect the Exchequer from sham contracts which do not represent the realtiy. There remains a moot point about whether a contract needs to be a "sham" to ignore it and whether a contract which is clear, but not what the parties claim to have intended is to be regarded as binding or not.

I agree absolutely with you and have been waiting for a double whammy for some time. Cases such as C&W and one or two agency cases like Wandsworth Boro Council suggest we are edging towards a wider acceptance that IR35 = employment rights. Which will make the end user clients sit up and take notice, and counters the argument that they have "nothing to lose" by fouling the water for their contractors by putting all and sundry in superior contracts. They, after all have driven this sorry mess, by wanting employees but not the costs of employment. Now it's time to pay. You want someone who looks, walks and talks like and employee? Then pay for one. He's called an employee.

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EAT v's Commissioners judgements
@ Nichola

"Sadly this is not the case, especially when you pop an agency between the parties."

As far as I'm aware there is no case law to support your opinion. In fact there is case law where an IT contractor working through his own limited company, was declared an employee of his client, countering your opinion.

However, if you can prove me wrong, then I'll concede. I believe that no one person has gone to both courts for a judgement of the same engagement and had a different result from each court. In fact I don't think anyone at all has gone to both courts to have the same engagement judged by both courts (many were hoping that Dragonfly would do this).

It stands to reason, and I can support my opinion with personal experience, that it is not in the interests of the legal system to have one court disagreeing with another. It is widely accepted that it is difficult to overturn an existing judgement from a lower court or equivalent court.

I believe the nearest anyone has approached the issue is my case. It was suggested by HMRC that I should be investigated under IR35, but I got to the EAT first and was judged to be not an employee of the client Hewlett Packard. HMRC declined to investigate me further. It is clear in my mind that HMG and HMRC had a great deal of credibility to lose should I be judged by the Commissioners to be caught under IR35. The establishment can't be seen to be disagreeing with itself.

Again, if you have facts or personal experience which can counter my opinion, then I will concede. I don't believe you will find any.

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One of those mysteries...
bearing in mind that the tests used by the Employment Appeal Tribunal and HMRC are so similar, you would think that the two would come to the same result. Sadly this is not the case, especially when you pop an agency between the parties.

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"Caught by IR35"
@ Rebecca

"someone who looks, walks and talks like an employee may well end up being caught by IR35"

and subsequently should have a claim in the Employment Tribunal upheld giving them employment rights, which ultimately should also neutralise the effects on them of IR35 as the employer would then be responsible for the employment taxes and not the individual. HMG cannot have it both ways.

If you are an employee for tax purposes then you are an employee for employment purposes. If the behaviour of the client/contractor creates a master/servant condition for tax purposes then it must create a master/servant for employment purposes. If the contract argument, as has already been stated, is superceded by the reality of the engagement for IR35 purposes, then the reality of the engagement should also over-ride the contract argument for employment purposes.

In my opinion, I could almost have won my case against HP and Certes, except that I couldn't convince the judge that in my engagement the behaviour of the parties had created a contract of service. However, the absence of a contractual nexus between myself and HP became the over-riding factor with the absence of any strong evidence that the behaviour of the parties had created a contract of service.

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Contracts are futile ...
So Rebecca, are there any other areas where written and presumably "binding" contracts routinely get disregarded in favour of what is perceived to be the reality ?

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Contracts are not the only fruit
The trouble in Dragonfly was that although the contracts did (lower) or maybe didn't (superior) say the right thing, the actual reality differed, and surely that was the key point - as Marc said "stabbed in the back by the client".

It doesn't matter how cast iron, copper bottomed, gold plated your contract is, (and theirs)unless that is borne out by what happens on the ground you are sunk. So no amount of lawyers and legal advice will protect you if the reality is different from what the contracts say.

Very succinctly put by Mike - what is being bought and what is being delivered ...someone who looks, walks and talks like an employee may well end up being caught by IR35.

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Naive perhaps
Or am I being naive?
And inviting cynicism?


the problem is that the only party who stands to lose financially is the contractor. The other parties have nothing to gain nor lose.

It's been traditionally thought that the contractor is also in the weakest position to negotiate since they are not in direct contact with the client and are not party to a contract by which they are being indirectly bound for the sake of IR35 and this mythical deemed contract.

If normal law applied then the content of the third-party contract would be irrelevant since the contractor is not in law a party to it and therefore is not bound by it in any way. However, since we are talking about hypothetical (i.e. deemed) contracts that exist only for tax purposes and examining a hypothetical relationship that is said to exist independently of the actual contractual relationship there is a problem.

Most agency contracts that the contrator sees are something of a legal mess anyway with lots of redundant and irrelevant clauses in them. There is a lot of focus of who gets stuck with the NI bill.

I'm no fan of IR35 but the very first draft made sense both legally and morally - if the deemed contract was one of employment then the deemed employer fell liable for the NI.

Naturally the deemed employers kicked up and the responsibility was shifted down to the contractor who is least in a position to defend themselves.

When you look at the whole situation from a revenue raising perspective you reach the conclusion that the law is constructed to make revenue collection easiest.

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quid pro quo
Someone (on this website?) has recently posed the question that perhaps offering a Contractor a contract containing terms which the Agency cannot comply with amounts to fraudulent conduct. If this is the case then it is in their interest to ensure the contract is more water-tight.
Maybe the success of their business model is dependent upon the fact that the Contractor and his adviser assume that the Client contract is in agreement with the terms of the Contractor contract.
I agree that IR35 is totally at odds with "Enterprise Culture" and "Knowledge Economy" but it is fairly certain that, given the political and financial situation which will exist for the forseeable future, the only way IR35 will disappear will be via a switch to Unitary Taxation.
And until that happens, we should focus on making our clients' goalposts stationary.

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non quid pro quo
I would have thought that it is in the best interests of the Agencies for them to take responsibility for the IR35 aspect as it is in their best long-term interests to do so.

Why should they - they have nothing to lose.
It would be different if within-IR35 status did anything - such as automatically forcing the contract into the Employment Agencies Regulations 'opt-in' category.

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Certainty is needed
As the Agency negotiates both contracts, then surely it is possible to insert a warranty from the Agency to the Contractor, that the Agency contract with the Client, does not contain any clauses which invalidate any part of the Agency contract with the Contractor.
If the warranty is there, the contract is probably "IR35-proof". If it isn't, it probably isn't. At least the Contractor will be gaining a degree of certainty about his tax affairs.
I would have thought that it is in the best interests of the Agencies for them to take responsibility for the IR35 aspect as it is in their best long-term interests to do so.
Or am I being naive?
And inviting cynicism?

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Feline Contracts

you are right, my cat's negotiation skills are lacking; especially in legal matters.

Instead what I am suggesting to you is that the legal advice is basically worthless. It is so on several points:

1) The Client-Agent contract is not seen. Where one exists it is critical. It is the one document that lays out what the client believes they are buying. This view is given lots of weight by HMRC BECAUSE it is outside of the contractor's control.

2) In interpreting shades of gray a legal opinion must come down in the end on the side of either black or white.

3) The legal opinion holds no weight with HMRC.

4) Every case that comes to court does so because those involved have already taken legal advice. It didn't help.

Asking someone else for a view is fine but once you've done it a few times you can look at a contract and the working arrangements and reach a view. You can even recycle the relevant citations.

None of it helps. No clarity exists in law.

Lawyers are fine when you have clarity of law. When there is no such clarity then my cat is equally qualified.

Without an agent in the loop I feel things are simpler. B2B contracts are negotiated with the client directly and everyone is clear about what is being bought and delivered. The moment you do not negotiate with the guy that writes the cheque problems start to arise about what the contract means and HMRC can go and choose who they talk to for an 'understanding' of what is going on.

Incidentally, my cat is currently offerring a contract review service for £99+VAT. This great rate is available because of the currently favourable Mouse-Sterling exchange rate!

My cat also promises that his reviews are purrrrrfect and so you can sleep soundly at night!

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..moving goalposts.......
....means we are getting nearer agreement, Brian!!

Various reputable specialists (who will have IR35 expertise and knowledge ; in this area, I would not feel it has to one particular profession against another per se) offer the service you describe and any accountant not expert or experienced in IR35 issues may indeed well wish to recommend their clients use such services.

So let's concentrate on where we agree
(i) yep - consult specialists. In this case, I would not say it has to be lawyer per se (but lawyer who specialises in IR35 is fine of course). Get changes made to the contract (but you will only get the "lower" contract which is a big problem as mentioned)
(ii) no-one gives guarantees.
(iii) insurance can be available, but it's no surprise that it is not as available (or as inexpensive) as days of yore, unless the case is black and white.

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Can your cat negotiate changes as well?
Mike and Martin,

I agree that there are many boiler-plate reviews out there, but I'm talking about a service where you send the contract and complete a form of working practises. You do this before the contract starts, so they can negotiate changes directly with the agency that are likely to bring it outside IR35.

No guarantees, but surely better than relying on an accountant to understand the vagaries of employment status.

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Thank you to the Mikes
The graphic - a confused set of dance steps - as in these are the indicators of employment v. self-employment - who can try and work out how it all goes...

The point about legal advice/IR35 proof contracts as Mike C says.

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empty words continued
Good grief, Brian.
Anybody (lawyer or otherwise) who could actually deliver on the statement

" For approx. £200, you can get your contract reviewed and amendments made to bring it outside IR35."

- and give an undertaking that he/she had brought the situation outside IR35,

would make a fortune.

Can you imagine how many takers they would have!! LOL

Various specialists do undertake contract reviews and then - depending on circumstances - offer insurance thereon. Not aware of anyone who still (i.e. as of now as opposed to previously) does this for a package price of £200.
And I am not aware of anyone reputable who does this by reference to the contract alone - those days are long gone. All reputable advisers look just as carefully at the proposed or actual practices as well as the contract, and have done so for at least the last 12 months or more.

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Empty words

for £200 you can get a contract reviewed. The review will not take into account any contract that exists between the agent and the cleint (which is the one that HMRC love to see) and will be riddled with disclaimers.

The moment that I see a reviewer say "I'll bet money on it" then I'll start listening to them.

Instead, some guy wants £200 to give an opinion where there are no consequences to him of being proven wrong in either direction.

Meanwhile the contrator has the consequences of being wrong and a fee for £200 to pay.

I'm sure I can train my cat to give the same boiler-plated responses that you will get from any review.

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A lawyer is not a luxury

For approx. £200, you can get your contract reviewed and amendments made to bring it outside IR35.

A lawyer is not a luxury - it's a necessity.

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An answer ?
I think it's meant to be "a merry dance" ...

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A question

I have found this article rather difficult to grasp, and I'm going to swallow my pride and seek help the help of others.

Can someone - Please! - explain to me what a picture depicting what appears to me to be the soles of the shoes of two two-legged people (one male one female) and two one-legged people (also one male one female) and also what could be a tin of sardines for all I know has to do with IR35?


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Good for you.

The majority of contractors do not have the luxury of a lawyer to examine each contract and cross examine the end-client each time they need to prepare a tax return.

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Accountants do not need to evaluate contracts
I don't ask my cook to dig up the vegetables from my garden. My gardener does that and the results are passed to my cook for subsequent processing.

Similarly, I don’t ask my accountant to detemine my IR35 status. My legal adviser does that and the results are passed to my accountant for subsequent processing.

I expect my accountant to calculate my affairs based on a knowledge of my IR35 status. Why should he/she have an input to the determination of the status?

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Get the end-clients on board
The downfall of Dragonfly is to some extent because the end-client stabbed him in the back by saying that the contract was a sham.

When this sort of thing happens, you can't rely even on the contract being supportive. IMO, this should provide grounds for action against the agency for fraud.

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The ills of IR35
@ Mike Carter

Your statements are entirely logical and valid. However, IR35 is neither about logic nor fairness. It is a thinly veiled attack on IT contractors and no other group. HMRC have had to couch the legislation in such vague terms in order to circumvent EU rules which state that tax laws must not target identifiable groups.

It is a political law and the mistake that our eminent colleagues in the Accounting profession are making is trying to handle it logically and dare I say "within the rules of engagement" e.g. they cannot say, as I believe, that the Commissioner's system is biased, and I use that word in its full legal meaning and not its English meaning. Commissioners who would regularly find in favour of the taxpayer, would not maintain their position for long, hence my opinion.

So the only way to deal with IR35 is to use guerrilla tactics just as the colonials did (and I did in my EAT) against the ruling English in 1776. An interesting fact is that the single largest group who signed the American Declaration of Independance were Welsh or of Welsh extraction!

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A point to watch out for is that highly skilled contractors may be engaged for who they are, and actual substitution may be impossible to practice. Likewise, the definition of "control" will change depending upon the nature of the work and the skills of the worker.

If I hire a QC to represent me in a matter of esoteric law it might be that another similarly qualified QC is not available. Does that make him my employee?

If I hire a carpenter to make a table for me and tell him that it must be 32" high, be made of Oak and have dimensions of..... does that amount to direction and control?

It seems to me that increasingly people are required to analyse lots of subjective facts to reach an absolute opinion on tax liability. This doesn't seem sensible.

How many judgements have we seen where it reads "I conclude that x,y, z amounts to..." or "I conclude that x,y,z does not amount to..."

The Dragonfly case seems to have thrown a [dragon]fly into an already speckled ointment.

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