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IR35 legal dangers of the standard agency contract

Prior to IR35 being introduced in April 2000 contractors could sign contracts with agencies without being too concerned whether or not the detailed clauses reflected the way in which they provided their services to the end client. But post IR35 this could be a very expensive mistake - costing you thousands of pounds in extra tax. This guide will tell you what to look out for.

With the introduction of IR35 it is very important that contractors who provide services as independent contractors (rather than simply supplying workers to work under the control of clients as if they were employees) ensure that their contracts accurately reflect the way they work. Otherwise they may find themselves caught by IR35 and having to pay thousands more in extra tax.

Negotiating contracts with agencies for IR35 compliance is hard

Contractors negotiating changes for IR35 compliance in their agency's standard contract often face an uphill struggle. Sometimes this is due to the agency being unwilling to spend time looking at clauses and gambling on the contractor giving in and signing the standard contract.

Often the agency will say that the client will not agree to changes and sometimes this is so. However many contractors will find themselves in the situation where they and the client are in agreement but the agency will not change the contract to reflect the realities of the situation.

Why is this and why, in particular, do some agencies try to insist on there being a clause in the contract which says that the contractor's worker will work under the control of the client?

The answer to this lies in the particular way that agencies structure their contracts.

How agency contracts work

Instead of simply charging a finders’ fee to the client, agencies generally insist on having a contract with the client under which the agent undertakes to provide the services to the client at a certain fee rate, and another contract with the contractor under which the contractor agrees to provide the service to the client on behalf of the agent for the fee rate minus, say, 20%.

Contractually this is a standard contractor/sub-contractor arrangement under which if anything goes wrong, the agency is directly liable to pay compensation to the client. The agency must then try to recover its loss from the contractor.

Agencies like to reduce their potential liability and one way of doing this is to put a clause into the contract with the client saying that the contractor's worker will be under the client's control, obey any reasonable instruction, and that the client must supervise the worker. If anything goes wrong it is more difficult for the client to sue the agency because the contract says that the client has control of the worker.

Thus although the client may agree that the services being provided by the worker are consultancy services where the worker is providing his judgement and expertise rather than being a servant obeying his master's orders, often the agency will still try to insist on a control clause.

These types of control clauses have been softened over the years since IR35 was introduced to indicate that the client is responsible for the contractor, as opposed to being "controlled". This is because "control" can mean something entirely different in employment law to being responsible for, or directing. When it comes to IR35, the word "control" is very bad indeed for contractors and control is central to whether someone is inside (caught) or outside( not caught) or IR35.

Can you simply contract direct with the client?

Many contractors who have struggles with agencies consider the possibility of contracting directing with the client.

But this isn't always as easy as it seems. For starters, if the agency has already introduced you to the client then the client will already have an agreement in place with the agency that contains a restrictive covenant - which basically means they cannot cut out the middleman.

How to overcome badly written agency contracts

Whilst it is ideal to get in place a contract that accurately reflects the nature of the relationship, this does not mean that a badly worded contract will put you outside IR35.

HMRC are well versed in side stepping written contracts during their investigations (often when the contract is rock solid) and claiming it is a sham and not an accurate reflection of the working relationship. This means that in the event of an investigation you can also do the same - but you will need to work harder during the contract and collect evidence that will indicate beyond doubt that you are outside IR35.

Updated: Saturday, 17 September 2016

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