The main purpose of this paper is to offer practical advice on the most important aspects of what needs to be contractually agreed in your terms and conditions, in order to circumvent IR35.

First a word of warning. While you are free to enter into whatever terms and conditions you wish, it is important that the contract represents a genuine agreement between the parties. Re-negotiating your contract terms must not be a mere paper-signing exercise. The contract must not be a sham. Sometimes people question “IR35 Proof” contracts, such as those produced by Accountax, on the basis that the terms may not fully reflect the reality of the working relationship. The answer to this question is so self evidently obvious it beggars belief: CHANGE! If for example, in the past you never maintained public liability or professional indemnity insurance but the IR35 proof contract requires this, then simply change and get the insurance. This is Janet and John stuff. There is no question that the way many contractors have worked in the past, and the terms and conditions in their contracts, would put them firmly in the firing line of the IR35 legislation. So to become an IR35 “exempt” business you have to stop acting, and contracting, like an IR35 “caught” business. And if this means that you have to change the way that you do certain limited things then so be it. It is not a question of getting the contract to fit your present modus operandi, it is a question of changing your modus operandi to comply with the terms and conditions in an IR35 proof contract. Once you can genuinely open your business mind to accepting that certain things may need to change you have taken the most important step in defeating IR35. There is a big prize at stake.

Accountax has drafted not only standard IR35 proof contracts but has drafted bespoke IR35 proof contracts for plcs, small and large agencies and individual contractors. They have all had an open mind. Those who say that it is not possible to renegotiate contract terms have usually not tried very hard. In our experience while there are certain end users or agencies who resist having to change their own standard contracts, often due to mere pride of authorship, they can become much more flexible when faced with market forces and the contractor who is determined to renegotiate his contract or vote with his feet. So yes, you may need to explain and educate, plead and barter but there is often room for negotiation and if you understand what the law really says you have a fighting chance of agreeing terms which enable you to fall outside of IR35.

In the classic contractor/agency/end user chain it is our view that the relevant contract is the one the contractor has signed ie. the contract with the agency. It is our view that the client of the contractor is the agency and NOT the end user. The contract the contractor actually signs is the one we have to concentrate on.

So what are the most important terms to establish in your contract? Without doubt the substitution issue is the single most important clause. The law says, and has done for many years, that the giving of personal service is a prerequisite to direct employment status. If you don’t have to give personal service you cannot be an employee. Therefore if you have the right to send a substitute then as a matter of law you will not be an employee. Remember, your opinion and the opinion of Accountax counts for nothing. What matters is what the law says. Quoting the words the judges have used is what will win the argument either in correspondence with the Revenue or when you are at the tax tribunal. The courts have said for many years that the right to send a substitute rules out direct employee status. This was re-emphasised in the Court of Appeal in 1999 in the Express Echo case – a case incidentally where the Inland Revenue had formed the view that the worker was clearly a direct employee. The Court of Appeal disagreed.

The right to send a substitute is just that - a right. Although the right must be genuine it is not necessary to demonstrate that a substitute has actually been sent. Contracts are concerned with rights and obligations. If a substitute is never sent, that is not the issue. The question to ask is whether or not there is a right. It is vital to note that the right should not be fettered or qualified as was established only last year in the Employment Tribunal Appeal case of Glasgow City Council v MacFarlane and Skivington. If you qualify the right to send a substitute it soon becomes no right at all. The Accountax view is that the clause should be unfettered to offer complete protection and certainly should not require the client’s permission.

Traditionally the law has referred to the unfettered right to send a substitute - what the courts have called an "unlimited power of delegation". This is why Accountax always advocate an unfettered right. But can the right be watered down and still be acceptable? There are two areas to consider here: first in the Express appeal in 1999 the court said a substitute with the same skill levels would be acceptable and this gives us some encouragement. However it should be remembered that in the Express case as well as there being the right to send a substitute, a substitute was actually sent on occasion in practice. We should also remember that traditionally the courts have without question preferred an unfettered right. Secondly, the Revenue themselves in their recently published Employment Status Manual have said that certain qualifications on a substitute clause will effectively be ignored by them and the substitute clause will be treated as unfettered. The Revenue essentially say if the clause is qualified in relation to the substitute's ability to do the work on time, his ability to work as part of a team and his personal quality of not being a trouble maker, then the substitution clause thus restricted will still rank as unfettered right of substitution. This sounds great but before we celebrate this apparent relaxing of the Revenue's approach to the thorny substitution issue we must remember that this is only the Revenue's current internal guidance. It has no force of law. At Accountax we are therefore very concerned that the Revenue may easily adopt a less generous approach and change its internal guidance at the drop of a hat. For sure it would be embarrassing for them but there would be little we could do about it. If, in the meantime contractors have negotiated a watered down substitution clause they may well find it comes back to bite them very hard.

We should not however lose track of the fact that it is not necessary to have a substitution clause to secure self-employment. In the absence of such a clause other factors have then to be considered, several of which are in this paper. It's just that with an unfettered substitution clause you are home and dry so it's worth fighting for.

Finally the qualification that a substitute with comparable skills may be sent is arguably not a fettering at all. If a contractor assigns, substitutes or merely uses other personnel to complete a contract it is already implied that the requisite skills will be required and provided in order to comply with the job spec.

In conclusion we still favour an unfettered substitution clause, and we see plenty of them in our contract review work. If the qualification merely says the substitute must have the requisite skills to do the job then we do not see this as a serious fettering as we believe this is implied in any event. But when we get into the realms of needing the client's written permission to send a substitute or only being able to send a substitute from a restricted and pre-approved list of candidates, we are skating on very thin ice.

The second most important clause is one clarifying that there is a “lack of mutuality of obligations”. This means the client is not obliged to offer ongoing work to the contractor and the contractor is not obliged to accept ongoing work even if it is offered. Although the Revenue play down the concept of mutuality (because it suits them) it carries great influence in law and was described in 1999 by the House of Lords as the “rock” on which direct employment status is based. It is worth noting that while there has to be some mutuality and irreducible minimum of obligations to create a basic contract (of whatever type) mutuality -in the context of employment status - means much more than this. It means an ongoing commitment by both parties to maintain a relationship of direct employment. Sometimes agreeing an open substitution clause can be difficult but getting your client to agree a lack of mutuality clause is usually something they are very comfortable with – yet so many contracts are silent on this point.

After substitution and a lack of mutuality what comes next in the pecking order of terms and conditions you need in your contract in order to escape IR35? The whole area of financial risk comes next. A contractor who is obliged to correct faulty work, liable for his mistakes, has no right to notice before his contract can be terminated, has no rights to holiday and sick pay or to partake in a grievance procedure, who has invested both money and time in capital equipment and training at his own expense, is demonstrating risk. The Revenue suggest that risk is essentially associated with only one factor: giving a fixed price for a job but the concept is much wider than this.

Getting areas of financial risk clarified in your contract is seldom difficult. Your client will be more than happy for you to carry financial risk!

After financial risk the remaining factors, in our view and in order of importance become: having a proper business organization, having freedom to undertake other contracts, the intention to have a self employed relationship and a lack of control, followed by a myriad of lesser factors. Please note that the control test and so called integration test so beloved by the Revenue have been played down very significantly by the courts over the last 20 years.

So the message is simple: understand what the law really says and be prepared to consider the way you do things. You only have to prove you are outside IR35 on the balance of probabilities. Wherever you can you should renegotiate your contract terms specifically to address substitution, lack of mutuality, financial risk and business organization. If you need your contract reviewing or help dealing with a Revenue enquiry please call us – we can help – and we enjoy our work!

Please post any comments or questions as usual to this conference paper. However, if you wish to find out more about Accountax services, please contact David Smith

David Smith heads Accountax Consulting, offering specialist consultancy, negotiation and dispute resolution services. He is a former tax inspector with extensive experience of General Commissioners appeals. David specializes in status disputes, contentious technical arguments and self assessment enquiries. Accountax provide contract reviews and IR35 solutions.