Contractor Doctor: I won my contract by tendering – does this put me outside IR35?

Dear Contractor Doctor,

I’m an IT contractor running my own limited company, specialising in building web applications to deliver public services online

As a result, most of my clients are now public sector organisations, such as local authorities, and I find out about new contracts when they publish an invitation to tender (ITT) online.

I now win most of my contracts through tendering – does this put me outside IR35?

Thanks

Aniela

Contractor Doctor says:

“Winning contracts by submitting tenders, proposals or pitches can be helpful in proving a contractor’s outside-IR35 status, because they demonstrate that they are in business on their own account,” explains Andy Vessey of IR35 specialist Qdos Consulting.

“By itself, winning a tender does not put a contractor outside IR35, but it can form part of the body of evidence a contractor can use to demonstrate to HMRC that they are not a disguised employee, but are genuinely in business.”

Demonstrating a commercial process

According to Vessey, when a contractor has to tender for work, they are demonstrating that there is a commercial process between their limited company and their client. This is a key factor that HMRC views favourably when undertaking an employment status enquiry.

“Contractors who can provide evidence that they have won work via some form of bidding process, and are therefore using commercial rather than employment practices to generate business, will go a long way to convincing a status inspector that the investigation should be halted in its early stages.”

And as tenders, particularly those issued by public sector clients, frequently specify that jobs must be priced on a fixed price rather than day-rate basis, this lends further weight to the ‘in-business’ argument.

Tendering for work is financially risky

“Tendering is inherently risky, because there is a strong chance that most bidders will not win the business,” says Vessey. “That means the contractor is taking a financial risk. Demonstration of financial risk can be a significant factor that puts a contractor outside IR35.

“Contractors creating and submitting tenders also incur time and possibly materials costs during the process. If the contractor fails to win the tender, they will be out of pocket as a result, which adds to their financial risk.”

Vessey explains that if the tender requires a contractor to submit a proposal on a fixed-price basis, this introduces even further financial risk. Under these circumstances the contractor has the potential to profit from the contract, or make a loss. Both of these situations would be positive IR35 factors, although not so positive for the contractor’s bank balance if they make a loss!

Good luck with your contracting!

Contractor Doctor