Dear Contractor Doctor,
I am an IT contractor, working through my own limited company, about two thirds of the way through a contract with a major financial institution.
The client wants to move me from my current contract with one of its businesses onto a brand new contract with another business. As well as changing my contract, the client wants to refocus it, taking a different approach from the project specification in my original contract; surely this might affect my IR35 status?
My client wants me on a new project and I’m not interested. Help!
Thanks
Anwar
Contractor Doctor says:
Contractors don’t get employment rights because they offer their services on a business-to-business basis to end-user clients. But contractors do receive protection under contract law, as long as they are prepared to exert it.
The bottom line is, there is no legal requirement for the contractor to move contracts and start a new project. Without the contractor’s agreement, a client cannot simply decide part-way through a contract to unilaterally change contract terms, such as the specific outcome that the contractor must achieve.
And, as Anwar rightly points out, for a client to be able to tell a contractor to do something different, it gives all the appearances of the client ‘controlling’ the contractor. Control is a key test of employment and could place the contractor inside IR35 and liable for additional income tax and National Insurance Contributions (NICs).
Time for contract renegotiation or notice?
A contractor would be entirely within their rights to respond to a client request to change company and job specification by indicating that they would prefer to continue with the contract as it is.
If the client says this is not possible, which is quite likely in this situation, then the contractor can choose to negotiate a new contract with the client, or request that their current contract is terminated by the client with notice.
There is no legal requirement for the contractor to move contracts and start a new project
Of course, this might upset the client and so, in the interests of not burning bridges with a client who may provide future assignments, an option might be for the contractor to compromise and suggest a reduced notice period.
It is possible that the client could be requesting a change of approach, rather than a whole new project outside of the original project scope, but the contractor needs to make that judgement call based on what is written in the original contract and what the client is asking the contractor to do now.
IR35 test of employment – control
If the contractor’s contract is being changed to reflect how the contractor should perform the services, this potentially flags the contractor as a ‘disguised employee’ on two counts, because:
- The contractor is taking direction from the client, has accepted a new contract with new conditions, and is being moved from project to project on the client’s say-so
- The contractor is being controlled by the client telling them exactly how to perform their duties by requesting a new approach, which is not the behaviour of a skilled independent contracting expert, but of an employee.
This is likely to be seen by HMRC as clear evidence that the contractor is controlled by the client, and therefore inside IR35.
IR35 test of employment – mutuality of obligation (MOO)
Another danger of a contractor happily going along with any changes a client might make is that it could infer mutuality of obligation, where an employer is obliged to provide work and an employee is obliged to take it.
As with ‘control’, if the taxman believes there is mutuality of obligation, the conclusion is likely to be that the contractor is a disguised employee who is inside IR35 and who should be taxed accordingly.
Record-keeping now could help avoid a future full-blown tax inspection
The fact that in this case the contractor, Anwar, is planning to resist the client’s efforts to control him is a positive point. But this should be followed through and all emails, meeting notes and any other evidence of how the situation is handled and ultimately resolved must be filed away in case of future investigation by HMRC.
Ultimately, contractors are not employees and so are not subject to the control and direction of their clients. But successful contractors must balance being flexible to clients’ requirements with maintaining their independent status outside IR35.
Good luck with your contracting!
Contractor Doctor
Published: Monday, October 25, 2010
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