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IR35 contracts, agencies and issues

Keith Preece from Qdos Consulting examines the grey areas between client, agent and contractor which sometimes leaves the contractor feeling somewhat in the dark.

It is becoming increasingly difficult to defend contractors against IR35 status enquiries. The "Case Law strategy" adopted in some quarters has backfired. In Usetech Ltd v Young, it was decided that the status of the worker should be based upon the terms of the "upper level" contract between the agency and the end client, which the worker had never seen, and over which he had no control. HMRC Status Inspectors around the country have taken this as a signal to obtain sight of the "upper level" contract in every case, and even to interview the end client's staff.


Armed with the appropriate Case Law, the documentary evidence of the contract, together with a witness statement from the end client's representative, the Revenue are far more confident than they once were of winning the argument before the Appeal Commissioners. As for the contractors, in an increasing number of cases they are finding themselves presented with evidence over which they have no control, about contractual terms that they have never seen, which are in stark contrast to the contents of their own contracts with their agencies. This is despite the strenuous efforts of the contractors and their professional advisers to draw up contracts that should render the worker firmly outside of IR35.

Typically, the contractor will have a contract with an agency that will say his or her company has a right to provide workers of its own choosing, who will work without the control and supervision of the end client, and that there is no mutuality of Obligation in the relationship between the worker and the end client. Then out of the blue the Revenue produces an agency-end client contract that indicates that what is required is the personal service of a named worker, and no other, who must work under the supervision and control of a manager employed by the end client. Furthermore, the Status Inspector produces notes of a meeting with the manager concerned, saying that the contractor was moved from task to task like an employee, that he never refused any work offered, and had to ask for permission to take time off.

Of course, the account given by the end client's representative might be at variance with the facts. But how does the contractor disprove what has been said, especially when the period under enquiry might be several years ago? And what about the evidence of the written contract? It is no good pleading that the contractor was not a party to the "upper level" contract and had no control over its content. In the Usetech case this argument fell on deaf ears. As one Status Inspector recently wrote: "The existence of certain facts that might not have been within the knowledge of the Personal Service Company (at the time) does not mean that those facts should be ignored".

What has gone wrong here?

When a contractor signs a contract with his agency, does he not have the right to expect that the contents of that contract will be similar to the terms agreed between the agency and its client? As for the agencies, are they deliberately deceiving contractors about their contractual terms, or are they just being badly advised? What about the end clients? Would they deliberately insist on engaging a contract worker upon terms that suggested the worker concerned was a disguised employee?

The answer to these questions could be relatively simple. Most end clients know little or nothing about IR35 - and do not want to be bothered. They want to engage temporary workers, whom they can manage and control just like their permanent employees, but who cannot claim employment rights because they are supplied by an agency. The end client deals with the agency and that is an end to the matter. For its part, the agency wants to please its customer and does not want to disturb the general "terms and conditions" document that it has used for years. All the agency needs to do to avoid any PAYE responsibilities is to insist that the contractor forms a limited company. Along comes IR35 and the contractor wants new terms written into the contract. So a new contract between the agency and the contractor is drawn up, supposedly outside of IR35, and everyone is happy. The agency is not necessarily setting out to deceive anyone; it is just a case of jumping through some hoops to get around a bureaucratic imposition.

Badly advised

It would be unfair to say that agencies have been deliberately entering into duplicitous contracts in order to deceive contractors and protect their own interests. After all, to obtain money and services by deception is a criminal offence. But there is evidence to suggest that agencies are being badly advised. In a recent example, the contract between the agency and the end client was a positive disaster from an IR35 point of view. Having read the document, one had to wonder whether the worker concerned was a disguised employee, a feudal bondsman, or a schoolboy. When this situation was queried with the agency, they replied that they would have to contact their professional advisers, who turned out to be a prominent firm of employment law and tax consultants.

Where does this leave the contractor?

Clearly, there is no point in trying to negotiate contractual conditions that would put you outside of IR35, without the positive support of your agency. Agencies need to be properly advised, so that they can assist contract personnel to make suitable arrangements, both in respect of the formal documentation and the day-to-day working arrangements. In view of the hardening attitudes of the Status Inspectors, and the encouragement that recent Case Law has given them, if contractors want to be taxed on a self-employed basis, they can no longer allow agencies and their clients to treat them like disguised employees. If you are taken up for enquiry, it is becoming increasingly more likely that you will be caught.

Published: Monday, 20 June 2005

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