IR35: Through a Glass Darkly

Those contractors who work through recruitment agencies tend to assume that the terms and conditions of their agency contracts are mirrored in the terms and conditions of the agency's contract with their client. However, as the contractor is not generally allowed to see the agency – client contract, the mirror image is merely an assumption. This may be an entirely logical assumption, but sadly it is not being borne out by the facts.

It is with a growing sense of concern – not to say alarm – that we are discovering situations in which the contracts are most definitely not "mirrors". On the contrary, there are a growing number of contractors who are discovering to their cost that the "IR35 friendly" clauses in their agency contracts simply do not appear in the agency's contract with the client.

The lack of consistency, or downright contradiction, between the contracts only comes to light once the contractor has become the subject of an IR35 enquiry by HM Revenue & Customs. Since the High Court judgement in the Usetech case, it has become common practice for the Status Inspectors to approach the end clients direct, seeking interviews and copies of contracts and related documentation. Once this evidence is presented to the contractor, it can be quite a revelation.

The most glaring omission from the agency – client contract is usually the supposed right of substitution, which appears clearly enough amongst the terms and conditions that the contractor has agreed with the agency. Unfortunately for the contractor, it is unlikely that the end client would tell HM Revenue & Customs that a right of substitution was in existence, if it did not appear in the written contract that it had signed up to. Sometimes there are rights of control over the worker, which are stated in the end client's contract, but which do not appear in any document signed by the contractor. This sort of anomaly can be disastrous for the outcome of an IR35 enquiry.

In one such case, when I visited the end client and explained what IR35 was all about, their representatives stated that they were more than happy to engage contractors on "IR35 friendly" terms. They had no idea that their procedures implied any sort of tax problem for their contractors. Nor were they aware that if they treated self-employed workers in a certain way, by expecting a personal service and directing the worker's activities, they were in danger of creating an employment situation. There was a general lack of understanding, but no lack of willingness to change, and certainly no wish to act against the contractor's interests.

It is difficult to say precisely what is going wrong in such cases. It is impossible to know whether the agencies concerned have tried to amend the contractual terms to place them outside of IR35 but have been thwarted by their clients, or whether the agencies have simply not bothered. But of course, the real issue for the contractors involved is that they were under the impression that their contractual arrangements had been tailored to suit the IR35 regime, and they are discovering far too late that this is not the case.

One obvious solution to this problem is for the contractor to ask for sight of the agency – end client contract. It is to be doubted whether most agencies or their clients would be willing to disclose the contents of confidential documents, but it might be worth a try. Any contractor who manages to succeed in obtaining a copy of the contract is strongly advised to have it professionally reviewed.

An alternative solution is for the contractor to approach the end client direct, with a request that they confirm in writing the nature of the working arrangements. Qdos Consulting is able to offer a Confirmation of Arrangements Review Service (CARS), which provides a suitable form for the purpose, and a detailed written review of the outcome. If the result is satisfactory, the completed document can be used as evidence in the event of a challenge to the contractor's IR35 status. Details of CARS can be obtained by email from Keith Preece - Qdos Consulting

Posted 25/01/06

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