Fighting IR35

NB: I am not a lawyer, have no legal training, and the following is definitely not legal advice. If you wish to investigate this issue further, you should consult with your legal advisor.

If you do any contracting work in the UK, IR35 is a major threat to your livelihood. Since April 2000, the Inland Revenue (equivalent to the IRS in the US) has been allowed to construct a hypothetical contract between you and your client, bypassing any intermediary such as your own company or any agency. The Inland Revenue can even invoke the contract between your agency and your client, a contract which you may never have seen or been a party to.

Under IR35, the Inland Revenue tries to argue that you are a "disguised employee" of your client; it constructs a hypothetical "contract of service" between you and your client rather than a "contract for services". Then the Revenue demands that you personally have to pay income tax and National Insurance as though you were an employee of your client, which can have disastrous financial implications for both you and your company. To prevent this happening, you need to convince the Revenue that you aren't a disguised employee of any of your clients. It's a case of "presumed guilty until proven innocent".

The factors for distinguishing between an employee and an independent contractor are complex, and even tax/employment lawyers with many years' experience can struggle to decide one way or another. One important factor is "client control" - can the client control what work you do and how you do it on a day-to-day basis? Many of the standard agency contracts have a clause that gives the client carte blanche in this area. This is a bad thing for you from the IR35 point of view, and you definitely want the agency to remove this clause. So how do you go about persuading the agency?

Well, nearly all of these standard agency contracts also contain a "handcuff" clause which prevents you (for a specified period of time) bypassing the agency and working directly with the client. The agency will insist that a handcuff clause is necessary to protect it from you going direct. And here comes the little-known part...

You must, of course, point out that under regulation 9(9) of The Conduct of Employment Agencies and Employment Businesses Regulations 1976, "a contractor shall not place on a worker any prohibition or restriction which is calculated to deter the worker from terminating his contract with the contractor and taking up direct employment with a hirer to whom he has been supplied".

A "contractor" in these regulations means a person carrying on an "employment business" (r1(2)) and an "employment business" is defined in S13(3) of the Employment Agencies Act 1973, under which the regulations were made, as "the business of supplying persons in the employment of the person carrying on the business, to act for, and under the control of, other persons in any capacity". By S13(1) "employment" includes "employment by way of a professional engagement or otherwise under a contract for services" and "worker" and "employer" are to be construed accordingly.

By Schedule 1 of the Interpretation Act 1978, "person" includes a body of persons corporate or unicorporate. By S5(2) of the Employment Agencies Act 1973 contravention of the regulations is a criminal offence.

Translating this legal gobbledygook into plain English, it is a criminal offence for an agency to specify that you have to act under the direct control of the client and simultaneously bind your company (and you) with a handcuff clause. The agency is therefore legally obliged to drop one of these clauses - and (trust me on this) it's definitely not going to drop the handcuff clause!

This is an effective way of ensuring that the "client control" factor goes your way in any IR35 investigation. If you're clever, you might even persuade the agency to insert a clause stating specifically that you're not under the day-to-day control of the client. Although this isn't a "get-out-of-jail-free" card for IR35, it can definitely help.

NB Please be aware that the Inland Revenue won't necessarily believe what's in the contract. The contract needs to reflect the reality, otherwise you'll still be in trouble.

If you're a contractor or independent consultant working in the UK, you should definitely be a member of the Professional Contractors Group. Amongst the other benefits of membership is insurance to cover the legal costs of any IR35 investigation.