Since the introduction in April 2000 of the Intermediaries Legislation, known as “IR35”, the word “contract” seems to have been on everyone’s lips. This is hardly surprising, because the IR35 legislation appears to be designed specifically to impose additional tax liabilities upon freelance companies that are contracted by their customers or clients to provide services, or sub-contracted to do so through other agencies. However, in the context of the enforcement of the IR35 rules by HM Revenue & Customs, the word “contract” might have become somewhat misleading.
Where there is a written contract to supply services between the freelance company and its client, or more commonly between the company and the agency acting for the client, it has become normal practice for the contents of that contract to be reviewed by an expert in matters of tax status, to assess whether it falls within or without the IR35 rules. However, as any such expert will concede, it is not possible to rely wholly upon terms and conditions stated within a contractual document. To be confident that the contract is genuinely outside of IR35, it is necessary to ensure that the day-to-day, practical working arrangements under which the services are supplied also remain outside of IR35. Thus all aspects of the engagement, from the written and theoretical to the manual and mundane, have to be considered.
It should also be borne in mind that a significant number of engagements to provide services are not subject to written agreements. In such circumstances, there is no written contract to consider, notwithstanding the probable existence of a verbal contract.
In the context of enquiries by HM Revenue & Customs, years of experience have taught us that a written contract that appears watertight for IR35 purposes is often insufficient. It is becoming increasingly common for Revenue Status Inspectors to pay only scant regard to the written contract and to seek to investigate the nature of the actual working arrangements under which the contracted services are provided. This means that the Inspector will approach the customer or client direct, to put questions in writing, or to undertake a face-to-face interview. Typically, the ensuing discussion between the Inspector and the customer or client will focus upon day-to-day issues that are not detailed within the written contract, and which the service provider might not have even thought about when the contract was signed.
For the freelancer who is supplying services in the confident belief that the terms of his contract place him outside of IR35, the results of the Inspector’s enquiries can be alarming. He might discover that his client has a rather different view of the engagement, and the client might have described the day-to-day arrangements in such a way as to lead the Inspector to conclude that IR35 should apply. The freelancer might end up wishing that he had clarified with the client all aspects of the engagement at an early stage in their association.
IR35 is concerned with employment status, which is a complex area based upon legal precedent rather than statute. In accordance with both precedent and the IR35 legislation, what has to be considered is the working relationship between the individual worker and the customer or client. These factors make it impossible to rely solely upon the content of a written contract. It is necessary to view all aspects of the engagement as a whole, and to pay particular attention to what happens in practice, or what would happen in specific, hypothetical but realistic situations. For the freelancer to remain confident of operating away from the tax burden imposed by IR35, some key aspects of the day-to-day working relationship with the client must be clarified.
Many tax advisers now recommend the use of some form of “Confirmation of Working Arrangements”. This is a list of key statements and /or questions that may be addressed by both the freelancer and the client, with a view to a joint clarification of the nature of their association, in accordance with the fundamental criteria used to assess employment status for tax purposes. Ideally this form should be brought into play at the outset, well before the Revenue Inspector decides to mount a challenge to the freelancer’s tax status.
The use of a “Confirmation of Working Arrangements” procedure is to be recommended especially where the freelancer is providing services through an agency. This is because the end customer or client might have formal agreements with the agency, the existence or nature of which is not evident within the terms of the freelancer’s own agency contract. Any lack of knowledge on the freelancer’s part would not prevent the Revenue Inspector from obtaining sight of the relevant documents, the contents of which might be damaging to the freelancer’s IR35 position. If the client refuses to sign some form of confirmation of arrangements, and the agency will not disclose to the freelancer the contents of its contract with the client, it might be time for the alarm bells to ring. On the other hand, if the client is happy to confirm that the arrangements are such that IR35 should not apply, then the signed “Confirmation” can be retained as evidence.
I prefer the word “engagement” to “contract”, because it is more encompassing, and helps to steer us away from the impression that IR35 is solely about the written contract. Whatever term one uses however, the point is that there is much more to IR35 than the freelancer’s written contract, especially where an agency is involved. Furthermore, it is both possible and desirable to strengthen the freelancer’s IR35 position by clarifying particular aspects of the working relationship with the client, in accordance with the recognised employment status criteria.