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Contractors caught by IR35 who believe the agent was at fault have few grounds to sue

Contractors who find that their contract is caught by IR35 often seek to pass the blame to their agency, claiming they were not told the full story and that the contractual terms implicating them were withheld.

But, as Roger Sinclair of Egos explains, the grounds for a contractor to take legal action and seek financial redress from an agency are few, and contractors opting for this route face an uphill struggle from the outset.

“IR35 and a contractor’s tax affairs are the contractor’s problem, not the agency’s or the client’s,” says Sinclair, a legal consultant who specialises in contractor issues. “Unless an agency can be proven to have been dishonest in their dealings with the contractor, then a successful legal challenge is unlikely.”

In business and responsible for business decisions

Sinclair explains that the contractor’s IR35 status will depend on three factors:

  • The reality of the contractor’s working relationship with the client, which includes the ‘notional contract’;
  • The actual contractual terms; and
  • Other evidence that suggests the contractor is in business on their own account.

“The contractor has some control and influence over all three factors,” says Sinclair. “But as for the agency, it only has ‘control’ over the contract, to the extent that the agency influences its contents. What that means is that the contractor is in the better position to influence two of the major factors on which their IR35 status will be tested. “So,” Sinclair continues, “when considering whether to accept a particular contract, contractors must exercise their business judgement - and accept responsibility for the consequences of their decisions.”

And taking responsibility means following through to make sure any IR35-friendly terms of the contract are actually stuck to. As an example, Sinclair says: “If a contract shows the client has no ‘control’ over the contractor’s project, yet they arrive on site only to find that the client tries to boss them about, thereby exercising control and placing the contractor at greater risk of being found to be inside IR35, it is the contractor’s choice as to whether they should accept this, or challenge the client.”

Limited grounds to sue the agent

Despite the clear need for the contractor to take responsibility over whether or not their contract is outside IR35, many still blame the agency when things go wrong. But, according to Sinclair, there are only two sets of circumstances in which a contractor may have grounds to take legal action against an agency if their contract is found inside IR35 and they suffer financially as a result:

  • If in the contract, the agency has made an express assurance which has been broken, or which events have subsequently shown to be untrue, and (in either case) if that has a material adverse effect on the contractor’s IR35 status
  • If the agency misrepresented the contract opportunity to the contractor, the contractor took their decision to enter the contract relying on that misrepresentation, and the result had a material adverse effect on the contractor’s IR35 status.

Sinclair comments: “If an agency includes an assurance in the contract that has a material effect on the contractor’s IR35 position, for example, a provision that the contractor will not be required to work under the client’s control, which does not match the reality, and if that materially affects the contractor’s IR35 position, then the agency may be in breach of contract, and if so the contractor may have grounds to seek financial redress.”

A contractor’s other option to make a claim would likely be on the basis of ‘misrepresentation’. This is where one party (in this case the agency) makes a statement before formation of the contact that is untrue, and another party (the contractor) takes the decision to enter the contract in reliance on that statement. A misrepresentation may be innocent, negligent, or fraudulent.

So there are some situations where, if an agency has lied to a contractor in a material respect which affects the contractor’s IR35 position, and if the contractor relied on the lie in taking their decision to enter the contract, and then loses out as a result by having to pay out lots more tax, the contractor may be able to sue.

Where the agent made an untrue statement and they knew it to be untrue when they were making it, this qualifies as fraudulent misrepresentation and, under these circumstances, the contractor may have a case

Roger Sinclair, Egos

Chances are slim of a successful claim

Sinclair warns that this route has its own challenges: “The contractor has to prove that the agency was at fault and that the agency misled the contractor. In addition, many agency contracts have exclusion clauses that disallow the contractor from taking action where the misrepresentation is innocent or negligent. It is not however generally possible to exclude liability for fraudulent misrepresentations – one which the person who gave it knew at the time to be false.

“However,” he continues, “where the agent made an untrue statement and they knew it to be untrue when they were making it, this qualifies as fraudulent misrepresentation and, under these circumstances, the contractor may have a case.” The contractor would have to show fault on the part of the agent, show that they had actually been misled by the agent and relied on the misrepresentation, and also prove they suffered loss as a direct result of having done so.

That’s a tall order and so, as ever, prevention is better than cure. “Contractors should understand that IR35 and their tax affairs are their own problems, says Sinclair. “So, when entering into any commercial relationship they should do so with their eyes open. And, if there’s any doubt about the contents of a contract under negotiation, contractors should always seek professional advice – it’s a small investment compared to the money that would be lost if HMRC found a contract to be inside IR35.”

Published: Saturday, 1 May 2010

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