IR35 & Share Incentives

In certain circumstances, contractors are offered shares by their end client as part of the contract terms and of how the payment for the contractor’s services is structured. The shares may be offered as an incentive to complete the contract or to hit specific pre-agreed deadlines or targets. However, what considerations are needed when deciding on whether to accept such a contract when taking into account IR35 regulations?

IR35 considerations

The main point to address is whether the share scheme being offered to the contractor is available solely for their use, or whether there is a pre-existing scheme in place for current employees. If the share scheme is only for the contractor, this should not pose any issue regarding IR35 legislation, as it is simply part of the way in which the contractor will receive their payment for the work provided to the end client.

Employee share scheme already in place

Where the end client already has an employee share scheme in place and it is also offering shares to a contractor, on the same or similar terms, HMRC are likely to interpret such a contract term as indicating that the contractor is an employee of the end client.

To help with this issue, a separate agreement should be drafted between the end party and the contractor and this agreement should be substantially different to the existing employee share scheme so it highlights the commercial arrangement between the parties. This should help dispel HMRC’s concern over the shares being offered as part of the contract terms.

End clients based abroad

Foreign-based end clients, often those in the US, sometimes offer shares within their business to both their employees and contract workers, regardless of what their status may be, with all self-employed workers being eligible. The fact that the end client does not discriminate between the status of the people who work for the business in offering the shares, is likely to make it OK for the contractor to accept the share term in the contract, as it is not distinguishing him or her as being part of the employed workforce.

Check the rest of the contract as normal

Before accepting such a share scheme, the contractor should ensure that the other elements of the contract and engagement surrounding control, mutuality of obligation and personal service are supportive of an outside of IR35 arrangement.

Posted by Beth Hogg