IR35 and the impact of working practices

Although the written terms within a contract are very important in assessing any potential IR35 issues, there is another aspect which needs to be factored into the assessment and that is the working practices between the contractor and the end client.

Should HMRC investigate a contractor from an IR35 perspective, the Revenue will review both the written contract and the nature of the working relationship. The reason HMRC are interested in the actual relationship between the parties is to ensure that it is a legitimate business to business arrangement, and that the contractor is not acting or being treated as an employee of the end client by the manner in which he or she acts and works, regardless of what the contract might say.

For example, although the contract may stipulate that the contractor has the control over how he or she performs the services agreed, if in practice, the end client sets strict guidelines on what the contractor should be doing and how, then the clause in the contract is not a true reflection of what is happening in reality. Equally, the contract may allow for a substitute individual to be provided but if the end client would never, in practice, allow this, HMRC may seek to use this to negate the impact of this clause in their arguments when challenging the nature of the relationship.

So, even if a written contract has been reviewed from an IR35 perspective and there are strong clauses regarding one or more of the three key tests (personal service, control and mutuality of obligation), it is potentially not enough just to have it in writing. The clauses need to be borne out by reality in the event of an HMRC investigation, i.e. the contractor should be able to demonstrate control over the work, or that a substitute really could be used if necessary (though, of course, one does not actually have to have been used to evidence this).

However, the above in no way diminishes the importance of having a good, genuinely drafted contract in place, which supports the commercial reality of the engagement and this will go a long way to establishing a proper business-to-business relationship. It is important that both the contract and the underlying working practices are in place, since with a contract that does not support at least one of the three key tests, HMRC would argue that there is no right for the contractor to exercise control or provide a substitute, even if he or she could do so in reality.

To be safe in the event of an IR35 challenge, both the contract and the underlying working practices must reflect a business-to-business relationship.

Posted by Beth Hogg