10 Myths about IR35- and the facts

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10 Myths about IR35- and the facts

There is a considerable amount of information circulating regarding IR35. We hope the following clarifies our view of the correct legal position.

1. Nearly all contractors will be caught by IR35
The Inland Revenue will say that most contractors will be caught while other sources believe that all contractors can avoid IR35. The application of IR35 depends upon the engagement and the individual contractor's business. According to informed sources upwards of 50% of contract engagements are legitimately project based and with the right contract and advice the contractor need not be caught by IR35.

2. A substitution clause is all that is required
A genuine right of substitution is a very important factor in determining self-employment status. However many attempts at including substitution do not take into account the relevant Case Law, the client's requirements and industry practice. There are important legal distinctions between assignment, substitution and sub-contracting that need to be taken into account and substitution is not applicable in all situations. All parties should agree. It would be dangerous to rely on a sub clause alone.

3. There are many IR35 'proof' contracts
Many so-called IR35 "proof" contracts are drafted without consideration for the real situation or the requirements of clients and agencies in the knowledge-based sector. To avoid the contract or clauses being labelled a sham contractors should ensure that contracts are professionally drafted, industry specific and truly reflect the relationship.

4. Client/ Agency contracts are not important
This contract is relevant to the Inland Revenue and the Courts and should ideally mirror the terms of the agency/contractor contract. Although the service company is not a party to the client/agency contract the IR35 legislation looks at the commercial relationship between the worker and the end client as evidenced by all the contracts involved. It would be unwise to rely upon the agency as being interpreted as the client in the legislation.

5. The IR35 legislation may be changed or abandoned
The Finance Bill 2000 containing the IR35 clauses has been debated in the House of Commons and was given Royal Ascent on July 28, 2000. Court of Appeal judgement has been handed down in the PCG appeal against the legality of IR35, and the PCG has lost the appeal in a unanimous verdict. IR35 remains in place as drafted. It is therefore important that contractors and accountants are aware of the options available and the best strategies.

6. Contract amendments are straightforward
A thorough understanding of the relevant case law, contract law, agency practices and industry realities is required to draft an appropriate contract. Significant financial liabilities may follow from a poorly drafted contract, both in general terms and more specifically if subsequently caught by IR35.

7. The decision is all based on the contract
In addition to the contract, the schedule and description of the work must be properly drafted and must accurately reflect a project-based engagement. Even if the contract contains all the terms associated with self-employment the work undertaken and the contractor's business practices need to be properly constructed.

8. Many agencies IR35 'friendly' contract will pass the tests
Some contracts being used by agencies do not sufficiently address the legal tests for establishing self-employment. In many circumstances it is possible for a contract to fully meet the requirements of the agency and the client and enable the contractor to genuinely fall outside IR35.

9. The Inland Revenue has approved a form of contract
The Inland Revenue has, in individual cases, passed a number of contracts, including several contracts drafted by Lawspeed. The Inland Revenue has not approved a form of contract nor will it. The substance and the form are important and contracts must be tailored to accurately reflect each engagement.

10. The only way to be certain is to ask the Inland Revenue
At present the Inland Revenue appears to be adopting a checklist approach with particular reliance upon the signing of timesheets and hourly pay rates as indicators of employment. These points are inconclusive and it may be better to seek expert independent advice rather than gain an opinion from the Inland Revenue.
FACT: Lawspeed has an unparalleled 100% success record in preliminary IR35 status arguments with the Inland Revenue (28 cases finalised to date, all successful), and we have a wealth of formidable case law at our disposal. We are able to offer various products and solutions to assist contractors in establishing their self-employed status.