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Contractor Doctor: New contract asks me to commit to limited time off – IR35 issues?

Dear Contractor Doctor,

I am an IT contractor and mid-way through negotiating a new contract working for a financial services client based in London.

The agency has sent me a contract with a clause I have never seen before, and which has apparently been added at the client’s insistence. It’s telling me that I can’t take a break during the contract that lasts more than ten days; nor can I take time off like this more than once in a six-month period. It also says that any time off must be in accordance with client needs.

If I sign a contract with these clauses, are there any IR35 issues?

Thanks

Derek

Contractor Doctor says:

“Most certainly yes,” explains Andy Vessey of IR35 experts Qdos Consulting. “Such a seemingly innocuous requirement draws together issues relating to control, substitution and personal service, so contract clauses like these should be negotiated out if Derek wants to stay outside IR35.”

According to Vessey, by insisting that a contractor limits time away from an assignment, a client is demonstrating that it is expecting the personal service of the contractor. By implication, the client is also questioning the contractor’s right to send a substitute during any break.

“A genuine contractor should be able to come and go as they please and, if the client is trying to restrict the contractors’ ability to take a break and supply a substitute that is not the case,” says Vessey. “The client would be demonstrating control over the contractor and negating the right of substitution, thereby placing the contractor firmly inside IR35.”

Clauses implying substitution, control and personal service must be avoided

If a tax inspector saw such a clause in a contract, it would trigger an immediate response because HMRC would interpret such clauses in the worst possible light, insisting that the contractor fails key IR35 tests of the contractor being in business – the right of substitution and control.

To overcome this issue, Vessey suggests that contractors find out why the client is insisting on a clause limiting the contractor’s time off. “It could be that the project deadlines are incredibly tight and the contractor plays a key role, so the absence of the contractor for more than a few days would result in missed deadlines,” says Vessey.

He continues: “The alternative solution might be to recognise the project urgency explicitly in the contract or through a side email or letter, rather than including a clause restricting the contractor’s absence from the contract. It is also important for the contractor to pass this requirement on to any subcontractors or employees the contractor may be planning to use to provide continuity of service.”

Some clauses requiring absence can be legitimate, and outside IR35

In some sectors, such as banking, it is not unusual to find a clause in a contractor’s contract that insists contractors working in sensitive assignments, spend a specific number of days absent from the a contract for a given length of contract, and this can be as many as 20 days.

Vessey explains: “Because the requirement is in the contract for reasons of compliance and security, and not because the client is attempting to exert control over the client, then this type of request would not put a contractor inside IR35. The same arrangement might also apply to all service providers to the bank, such as auditors.”

Equally, Vessey confirms that contractors can specify times when they will not be available to supply services, such as for holidays or periods of training. “As it is the contractor and not the client negotiating such terms then this should have no bearing on their IR35 status.”

When a contractor comes across any contract clauses that place restrictions on their activities, it should sound alarm bells

Andy Vessey, Qdos Consulting

But Vessey warns contractors that, in this instance, HMRC may still ask why the contractor did not supply a substitute or subcontractor to carry out services in their absence. “Contractors should prepare for HMRC to question the arrangement, but if the client is happy with these terms then it would not make commercial sense for the contractor to incur the costs of a substitute unnecessarily.”

Vessey concludes: “When a contractor comes across any contract clauses that place restrictions on their activities, it should sound alarm bells. If concerned about contractual restrictions on time off, contractors should consult an IR35 expert and have the clause amended or negotiated out.”

Good luck with your contracting!

Contractor Doctor

Published: Wednesday, February 9, 2011

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