2 or 3 contractors working under same firm

[tim123]

I'm not sure about that. Some senior employees of company's are often priviliged enough to get someone in to cover for them while they attend a conference away or something of that sort. What about employees who hire their own temps to cover for them whilst they are away on holiday? Do they someone become businesses? I think not.

No, employees on holiday do not employ a temp to cover for them when they are on holiday. Their employer does.

This is the crucial difference. For a subs clause to be effective, the worker must hire and pay for his own replacement (hence taking on the risk if the replacement stuffs up). No employee ever does that.

Substitution does make anyone automatically regarded as a business outside IR35 unless other strong pointers are present

Substitution is enough on its own - Express and Echo Publications Ltd v Tanton.

tim

[Euro-commuter]

So what happens in a scenario where you have a contract which is (hypothetically speaking) within IR35 - however you also at evenings and weekends work on something that requires reinvesting that money into other areas of the business (say - web hosting or something and you need to spend the money you earned from the contract on hardware initially to get the business up and running).

How do they work all that out?

Your day job is within IR35.
They calculate a "deemed payment" from this, and you have to pay tax + NICs on that as if it were salary (unless you have already paid at least as much).

That deemed payment is equal to your IR35-caught income, minus such actual expenses as would be equally available to an employee, minus 5% to allow for other expenses.

Voila! Your tax and NIC liability on the IR35-caught income has been calculated. Further discussion of what you do with your part of that income is irrelevant.

[XLMonkey]

If you have 2 or 3 contractors (say a husband and wife team) both working as directors in one limited - how are these viewed from an IR35 point of view?

Or to put the question another way - when does a small group of contractors cease to become a small group of contractors and instead becomes a 'small consultancy'?

It doesn't make a huge deal of difference - IR35 is assessed on a contract by contract basis, so you could easily have one of you working on a contract inside IR35 and one on the outside. It's also a hassle, as you would need to manipulate the share structure in order to ensure that all workers took out money in proportion to their fees (admittedly, if its husband and wife this might not be so much of an issue).

Look at it this way, scale the situation up to 100 people and you're looking at a composite. Do they save you from IR35? I think not.

[ASB]

Substitution does make anyone automatically regarded as a business outside IR35 unless other strong pointers are present. It's just that a genuine right of substitution has to be present in the terms and in practice to earn the right to be considered a business (along with MOO and no client control which are also critical own biz pointers).

There is no "unless".

- An absolute right of substitution is incompatible with being employed. This is established case law - but I forget the case. One of the problems though is trying to establish this in the notional contact, I accept this is big hurdle.

- Actual substitution kills the requirement for personal serivce stone dead. This then cannot be employment. Personal service is required for employment. Same case law. It is possible that the IR might try to construct a series of notional contracts, i.e. that 3 monther was really 5 weeks, followed by 1 week which was substituted, followed by 7 weeks. So one was clear for a week. I think they would have a hard time making it stick with the comissioners though.

[IR35 Avoider]

Or to put the question another way - when does a small group of contractors cease to become a small group of contractors and instead becomes a 'small consultancy'?

It's not enough for each contractor to own less than 5% of the shares. You also have to be sure that each contractors income cannot reasonably be attributed to work they did for particular clients.

The trick is to make sure that what contractors receive is sufficiently related to what they bring in for them to be happy, but not so related that there is a direct link based on how much income they generated from clients. If there is no direct link and they each own few than 5% of shares then the company is not a caught intermediary, so IR35 doesn't apply, regardless of the nature of contracts and working conditions.

Discretionary bonuses and performance-related share and share option schemes are useful ways of ensuring that in the long term each contractor gets what he deserves, but in the short term there is no way HMRC can say that what he gets is linked to what he brings in from a particular client.

Note this not a dodge, but you are trying to operate on the exact borderline of what the legislation says, in order to get round it. It's simple to step away from the border; just pay contractors similar amounts, regardless of what they bring in. In practise contractors will not want "their" money going to someone else, but the more you do to contractually and legally link what they bring in to what they get, the closer you come to stepping over the mark that will make the company a caught intermediary for IR35 purposes.

[ASB]

No it's not. Case law is not the same as legislation. Just because there has been one judgement on this, that does not mean to say that other judges won't interpret it differently.

In terms of case law and interpretation I think you are mistaken. The interpretation is binding in a lower court. The only thing that can really happen is to say doesn't apply because the facts are different. This may then give rise to appeal because the judge may/may not have erred in law.

Why is the big three clauses considered so important in the contracts. If you are so right, then no one would bother with the other two.

They are not additive, they are independant. If any one of the conditions is met then it cannot be employment.

Within the context of IR35 of course the trick is getting those in the notional contract, since it is this work of fiction that will be judged.

[tim123]

No it's not. Case law is not the same as legislation.

It is until there is an appeal to a higher court. The fact that the IR did not appeal at the time suggests that they believed that they would not win in the higher court. They cannot now appeal the same arguement in a lower court as it has been settled by a higher one.

Just because there has been one judgement on this, that does not mean to say that other judges won't interpret it differently.

Yes it does. That is how case law works. If the facts are the same the ruling of law from the previous higher case must be followed. The judge in the lower court has no discression at all in this matter.

Why is the big three clauses considered so important in the contracts. If you are so right, then no one would bother with the other two.

Because in the real world, most clients won't accept a sub. I've said it before, and I'm having to say it again. The most important thing that I take to my client each day of my contract, is the accumulated knowledge that I have learn about the client's software, systems, processes etc during the time that I have been there. By taking this informaton I produce ten times the amout of useful output that I could if I didn't have it.

If you do a job that doesn't need this then type of info you can send in a sub and the client will be happy. But if you do then only a very foolish client will actually let you sub. So, the finding of fact would be, that you didn't actually have a subs right at all, whatever the contract said.

tim

[Robwg]

Because in the real world, most clients won't accept a sub. I've said it before, and I'm having to say it again. The most important thing that I take to my client each day of my contract, is the accumulated knowledge that I have learn about the client's software, systems, processes etc during the time that I have been there. By taking this informaton I produce ten times the amout of useful output that I could if I didn't have it.

To be fair - most clients would probably take a sub if they got to interview him first - and that isn't too different to a lot of clients at bigger consultancies work (i.e. the clients frequently want to interview people who Cap Gemini for example put forward to work on their client sites - before actually letting them on).

But I do agree - the whole substitution clause thing seems completely out of kilter with my experience of the working world.

[Robwg]

So what happens when Accenture need to replace a consultant with another of similar ability? As contractors to the end client, do they then have to carry out the work themselves or do they ensure the same person stays? Neither is my answer. Each employee is a substitute automatically, but that doesn't make a difference when someone else is called in to do the same job.

At Accenture and Cap Gemini and firms like that the client quite often demand to interview any person who is put forward to fill in a specific role - particularly if it is on a client site (it depends on the client obviously).

I know - I was put on a couple of them and it is a fairly standard process (particularly if they will be working under a client manager).

So even with the bigger boys, it isn't quite the 'xxx isn't avaiable - take person yyyy and shut up' scenario you like to make out.

As consultants we are able to carve up the job into essential high skilling to donkeywork in most cases. It's perfectly possible to farm out the donkeywork to a lower paid freelance temp or paid agency temp you hire and pay yourself to save you time but do it from their own premises. You are still exercising right of substitution as you are being asked to complete the whole piece of work and what it involves for you in terms of time taken to complete it. The client needn't even know that you've hired a temp to do some basic work that doesn't need a high level of knowledge or understandng of the whole project.

Obviously you could do that - but when most roles are 1 persons worth of work - why the heck would you want to waste money doing so when you could do the work yourself? You might as well just pay IR35.

[tim123]

So what happens when Accenture need to replace a consultant with another of similar ability? As contractors to the end client, do they then have to carry out the work themselves or do they ensure the same person stays? Neither is my answer. Each employee is a substitute automatically, but that doesn't make a difference when someone else is called in to do the same job.

Accenture work under a different contract terms to you and I. Some clients (like my last) use them precisely because they DO have a pool of people who can replace a leaver. The terms also allow to send back any unsuitable replacement at no cost.

One man bands do not. Whatever the sales pitch said, the savvy client knows that a contractor cannot just find a a replacement for himself at the drop of a hat. You might like to sell yourself on the basis that you will find a suitable replacement, but when you actually have to come up with the goods you might not be able to.

It is perfectly possible for a contractor (one man band) to train and replace themselves on the job whilst they go off and do another. The question is not whether it can be done at all, but whether it is really cost effective to do so? Probably not in most cases.

And this is the point. You can try and negotiate this if you like. IMHO A knowledgable client is not going to buy into it.

As consultants we are able to carve up the job into essential high skilling to donkeywork in most cases. It's perfectly possible to farm out the donkeywork to a lower paid freelance temp or paid agency temp you hire and pay yourself to save you time but do it from their own premises. You are still exercising right of substitution as you are being asked to complete the whole piece of work and what it involves for you in terms of time taken to complete it. The client needn't even know that you've hired a temp to do some basic work that doesn't need a high level of knowledge or understandng of the whole project

Of course we CAN work this way. But this is the holy grail of quoting for a fixed price piece of work and supplying a complete solution. I've wanted to work this way for the whole of my 25 year contracting career, and so have most of the contractors I have worked alongside. IR35 has nothing to do with it. I've yet to find a client prepared to let me work this way. And (once again as I've said before on this board) I've only ever know one contractor manage it. You may work in a sector which is more receptive to this method of working. I do not (and I suggest most contractors do not).

Tim