Dear Contractor Doctor,
I am an IT contractor working in the games industry and am mid-way through a six-month contract direct with my client. The first three months of the contract has been on-site under the direct control of the client as a member of a development team and I have clearly been within IR35, and made provision for deemed payments with my fee income.
However, for the next three months I won’t be based in my client’s offices working with the development team under the supervision of the project manager. I’ve been given a specific part of the game to develop and I have been told I can work from home and will only be expected to deliver on specific project milestones, and report on an ad hoc basis.
With half my contract onsite and half at home, am I caught by IR35?
Contractor Doctor says:
According to IR35 expert Kate Cottrell of Bauer and Cottrell, Anita’s scenario crosses into three key areas, each of which ought to be addressed, although one only impacts on the contractor’s IR35 status.
“Firstly, with such a shift in the way of working and contract deliverables, Anita should be asking for a variation in the contract or possibly a brand new contract that accurately reflects her new way of working,” explains Cottrell. “Second, irrespective of the written contract, the contractor’s working practices and relationship with the client may have changed significantly and need to be examined in greater detail.
“And thirdly,” she continues, “the contractor should ensure that, once all other issues have been clarified, her IR35 status is correctly accounted for, so assistance from a contractor accountant may be required to ensure this is completed correctly.”
Don’t confuse tax rules (IR35) with contract law
Cottrell says that a contractor experiencing such a radical change in working practices and deliverables should ensure that a written contract variation is agreed with the client, or a brand new contract drawn up.
But whilst the contents of contracts, and contract law, can have a major bearing on the IR35 status of a contractor, the reverse is not the case, as IR35 is tax legislation and does not impact on contract law.
“It is in a contractor’s own interest to have a contract in force that accurately reflects their actual working practices, particularly if deliverables change,” warns Cottrell. “At this stage, expert input from an IR35 and contracts specialist could ensure the new contract is outside of IR35.”
What the client thinks
The existing contract, a variation to it or even a brand new contract might state one thing, but if the client does not think the same, then an HMRC inspector is likely to find it easy to pick holes in the contractor’s case.
“It all comes back to how the client views the relationship, and if the client thinks that Anita will still be under supervision and control even working at home,” continues Cottrell. “That’s the evidence the client will give to HMRC.”
What’s more, it may be that the client’s employees also have the right to work at home on projects, in which case the point is neutral. “If that were to happen, it could prove difficult to argue that the contractor has suddenly shifted from being a disguised employee inside IR35, to being in business for themself and outside IR35.”
Personal service not proven
But if the client treats the contractor as a contractor, and there is evidence of the contractor being in business, then the scenario is plausible. “A genuine contractor has the right to work at home, whereas most employees can have that right withdrawn,” says Cottrell. “Plus, as the contractor is using their own heat, light and equipment, this further strengthening their in-business case.”
It is in a contractor's own interest to have a contract in force that accurately reflects their actual working practices, particularly if deliverables change
If the contractor is working from home, the client does not know who is working on the deliverables for the contract, and that could mean that the contractor is not necessarily required to provide personal service.
“If Anita’s client genuinely considers her to be a contractor working at home on a specific project, employees of the client are not granted the same sort of rights and there is strong evidence that the contractor is in business, then Anita could argue that the first three months of her contract were inside IR35 and account for her deemed payment accordingly. Then,” she continues, “the last three months is outside IR35 and no deemed payment calculation is due.
“IR35 is engagement-specific,” concludes Cottrell, “and that can apply to an engagement like Anita’s, which shows significant variations.”
Good luck with your contracting!