Your paper contract could be a key component of a successful defence against an IR35 investigation. It could also be deemed absolutely worthless and overridden in court by a tribunal judge. The difference between the two could be thousands of pounds in taxation, penalties, and IR35 defence costs.
- Your working practices take precedence over your written contract
- HMRC can easily challenge your contract on the basis that it is a ‘sham’
- A good contract will help shut down an investigation, a bad contract will invite one
Here we explain when your contract is important, when it isn’t, and how you can ensure that it helps you avoid an IR35 investigation.
IR35 – when is a contract considered a ‘sham’?
A contract that doesn’t reflect the working arrangement can be dismissed in court by a judge, who will always consider the notional contract – how the working relationship works in practice.
The Supreme Court case of Autoclenz v Belcher (2011) was a landmark case that set legal precedent, enabling future judges to set aside contracts in favour of the reality. The judge in this case upheld the ruling that 20 individuals were employees and not self-employed, as their contracts suggested.
The written contracts were dismissed as ‘sham’ contracts because:
- They implied the absence of a mutuality of obligation (MOO), but the working practices suggested otherwise
- They included substitution clauses which weren’t enforceable in real life
- The contracts did not reflect the true agreement between the parties
What the Autoclenz ruling means for contracts and IR35
For independent contractors, this means that a contract can include multiple clauses that would suggest the engagement is outside, or not caught by, IR35, but these will count for nothing if they are deemed to either be unenforceable in practice or not an accurate reflection of reality.
The Autoclenz ruling was a landmark case, which has formed the basis of many subsequent employment tribunal outcomes. Written contracts for the likes of Uber, CitySprint and Addison Lee have all since been disregarded in court.
In each case the company used the written contract to establish an engagement of self-employment, yet the tribunal judge awarded the claimants ‘worker’ status based on the working practices. The same set of employment case law rules are used to determine IR35 status, and proves that you cannot rely on contract wording alone to mitigate IR35 risk.
It also highlights an argument upon which HMRC can, and will challenge contracts. The taxman can contest that any contract is a ‘sham’, and you therefore need to be prepared to prove otherwise.
When can a written contract strengthen an IR35 defence?
Given that your contract can be dismissed in court, does it now have any importance? Well, yes and no. It can still play a critical part in a defence against an IR35 investigation, providing it aligns with the working practices. If it doesn't, then it's pointless.
If a contract provides no indication that IR35 may be present, and it accurately describes the working conditions, the chances of the taxman pursuing you through the courts are slim.
HMRC will only go after contractors it stands a good chance of beating, and won’t waste time and resources on cases that it is unlikely to win. As such, a well-drafted contract can help to shut down an IR35 investigation before it has even started.
When might a written contract invite an IR35 investigation?
Equally, a poorly worded contract is only going to encourage HMRC to investigate. Your working practices could leave you well outside of IR35, but if HMRC decides to challenge your IR35 status in the first place, you still stand to lose much in the way of time and defence costs.
Just as you can’t rely on the contract alone to protect you from IR35, you shouldn’t rely solely on your working practices to fend off an investigation. This is why it’s critical to ensure that there are no question marks over your contract in the first place.
Why should I negotiate my contract for IR35?
Many agencies and clients will have a standard contract that they expect you to accept and sign. Don’t do this. Every contract should first be examined by a contracts lawyer who has specilaised IR35 expertise - they can then flag up any IR35 hazards and help provide some professional redrafting for you if it is needed.
This will inform you when you negotiate amendments to the contract to mitigate any IR35 risk. There are further benefits to negotiating your contract, particularly if your IR35 specialist assists you:
- It strengthens the contract, minimising your risk of an IR35 investigation
- It demonstrates due diligence, strengthening your defence against any investigation
Whilst your contract is only one of many factors when evaluating IR35, taking measures to ensure it is tight and accurate can significantly bolster an IR35 investigation defence.