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Contractor Doctor: My client is offering employee-style perks – should I accept them?

Dear Contractor Doctor

I’ve recently been offered a role with a Canadian company that has no UK offices or presence. After I verbally accepted the role by telephone, the company sent me the contract. I am concerned that some of the conditions might put my IR35 and ‘in business on my own account’ status in jeopardy.

For example, the client’s proposal says that I will be set up as a consultant for accounting reasons, as the company has no UK office, but I can expect to “receive the benefits of an employee”, such as holiday pay, expenses and medical insurance.

My client is offering employee-style perks – should I accept them?



Contractor Doctor says:

The short answer is that limited company contractors should avoid accepting conditions that in any way make them look like disguised employees, and place them inside IR35. Being found inside can reduce a contractor’s take-home pay by as a much as 25%.

A contractor in this situation has a range of options to head off any potential HMRC investigation. Negotiating the terms of the contract with the client, after seeking professional advice, is likely to be the best option for contractors being offered employee-like terms and conditions.

Beware of contract terms that indicate employment

One of the first documents that an HMRC inspector will request when undertaking any kind of compliance review is the contract. Although case law confirms that a contractor’s relationship with their client, and their actual working conditions, will ultimately determine their IR35 status, it is best to head off any review before it gets off the ground.

A contract review by an IR35 specialist is relatively inexpensive, especially when compared with what a contractor stands to lose if found inside IR35. The review will flag which terms might place the contractor at risk of being found inside IR35.

Contractual terms, such as payment for time off if the contractor is on vacation or unwell, are like a red flag to an HMRC inspector. Similarly, perks such as medical insurance are also well inside employee territory and should be avoided.

Renegotiate the contract, using expert help if required

In Paul’s scenario, when the written contract has not yet been signed, there is still scope for the contract to be rescued. As long as the deliverables and overall costs remain the same, most clients will respond positively to proposals to change the contract.

Ideally, a contractor should be able to effectively transfer the cost of the ‘perks’ to the client into their gross fees. So, for example, the additional cost of the holiday pay and medical insurance could be converted into a cash sum and added to the contractor’s monthly rate.

If the client pushes back, then seeking professional assistance to negotiate the contract can help secure the right result, particularly if the client thinks they are employing someone rather than hiring a service provider.

Ideally, a contractor should be able to effectively transfer the cost of the 'perks' to the client into their gross fees

The client may simply require educating about how hiring a contractor rather than employing a worker can reduce their risk, especially if they are making their first foray into the UK and European markets.

But simply accepting the contract that specifically references items such as paid holiday and medical insurance, the contractor will look to the taxman like an employee; for those wanting to stay outside IR35, this should be avoided at all costs.

Published: 10 April 2014

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Contractors handbook