How to fall outside IR35

[AnthonyQuinn]

There have been cases when the substitution clause has been dismissed because the contractor did not actually know someone who could replace him if necessary. HMR&C's opinion is that if you are going to work outside IR35 you should operate as a business e.g. if you employed a building firm to build an extension for you, you would expect the job to be finished as promised even if the builder who started the job became unavailable. Totally different to the average contractor situation, obviously, but that, rightly or wrongly is the way it's viewed by HMR&C.

Good that there is the tribunal. Otherwise if we hired a builder to renovate our house for a few months, and he didnt know BEFOREHAND who would do the work if something happended to him, he would be considered an employee by HMRC. What morons?

[malvolio]

I'd love to see the RoS position properly challenged. Show me an employee who has the contractual right to send in a substitute if they cannot work themselves...

AFAIK the only example extant is Dragonfly. There the RoS clause was inserted after he had started work in reponse to the then new IR35 legisaltion, so could well be considered to be a sham (as ewre several other contract clauses in that case). So I'm not sure a proper precedent was set.

[LisaContractorUmbrella]

Good that there is the tribunal. Otherwise if we hired a builder to renovate our house for a few months, and he didnt know BEFOREHAND who would do the work if something happended to him, he would be considered an employee by HMRC. What morons?

Sorry, not sure I made the point clear AnthonyQuinn - a firm of builders would know of someone to finish your renovation because they have a number of employees who are all equally as qualified as the original builder. They would not necessarily know the name of the individual who would finish the job at its commencement but they could name a number of individuals who would be capable of finishing the job should it become necessary.

[LisaContractorUmbrella]

I'd love to see the RoS position properly challenged. Show me an employee who has the contractual right to send in a substitute if they cannot work themselves...

AFAIK the only example extant is Dragonfly. There the RoS clause was inserted after he had started work in reponse to the then new IR35 legisaltion, so could well be considered to be a sham (as ewre several other contract clauses in that case). So I'm not sure a proper precedent was set.

In the Dragonfly case it was partly that the clause was inserted in an attempt to comply with IR35 legislation but it was mainly because the AA admitted under questioning that they would not, in reality, accept a replacement for the contractor without prior approval. The case also indicated a change of tack by HMR&C when Mr Justice Henderson quesioned whether it was actually possible for a 1 man limited company to operate a ROS at all.

[PhilAtBFCA]

Ros

Please excuse the question, but its a Friday.

What is ROS ( S=Substitution I guess )

Phil

[malvolio]

Right of Substitution - one of the three key tests for IR35, the others being Direction and Control (D&C) and Mutualty of Obligation (MOO - more accurately Irreducible Mutuality of Obligation). The logic is that a permie cannot use a substitute, so if you can, potentially or in fact, you aren't an employee.

Snag is, HMRC and, increasingly, the judges are choosing to ignore such contractual rights, even when all parties are happy to abide by them and stick to their interpretation of the actual working arrangements, usually as explained by some disinterested HR wonk rather than the people actually involved in the engagement. That further muddies the already pretty muddy definitions used in IR35 cases: the sooner we are shot of it altogether, the better.

[MPwannadecentincome]

Right of Substitution - one of the three key tests for IR35, the others being Direction and Control (D&C) and Mutualty of Obligation (MOO - more accurately Irreducible Mutuality of Obligation). The logic is that a permie cannot use a substitute, so if you can, potentially or in fact, you aren't an employee.

Snag is, HMRC and, increasingly, the judges are choosing to ignore such contractual rights, even when all parties are happy to abide by them and stick to their interpretation of the actual working arrangements, usually as explained by some disinterested HR wonk rather than the people actually involved in the engagement. That further muddies the already pretty muddy definitions used in IR35 cases: the sooner we are shot of it altogether, the better.

I think they are looking to see that the contract and the actual work arrangements match up - anyone can agree a contract - if the working arrangements do not match the ROS, D&C and MOO conditions and they can get proof / or you get stitched up - then they've got you.

[PhilAtBFCA]

the judges are choosing to ignore such contractual rights

Thanks for your explantion of the shorthand :-)

I cant see the judges ignoring contractual rights at all. Reading the judgements of the last cases including the Tilson Employment Tribunal one I wrote about recently, the judges do not seem to be ignoring the contract terms at all.

I see what they are doing, is not relying on the contract when it is not what is really happening, or it is "bogus" or a "sham" both words used in cases in the past. To me they are looking for two things:-

1. The working conditions are reflecting the contract
2. The Upper ( Agency>Client) contract reflects the Lower ( Agency > Contractor ) contract.

The second of these was the real show stopper ( IMHO ) in Dragonfly. OK there was the fact the the Substitution caluse was inserted after IR35 was introduced and was not there before, the fact that the client did not think a substitute could be sent, in spite of teh contract, but the fact that the agency and the client didnt even have that in their contract really blew it.

This has clearly showed why you cannot rely, from the point of view of wanting to prove being outside IR35, on just one of the three "Irredicible Minimum Of Three" not being featured in your working arrangements and contractual terms.

It also shows that contractors who wish to manage their IR35 status effectievly need to ensure day to day consistency with contractual terms.

Phil

[Peoplesoft bloke]

To me they are looking for two things:-

1. The working conditions are reflecting the contract
2. The Upper ( Agency>Client) contract reflects the Lower ( Agency > Contractor ) contract.



Phil

There's the rub. Your status in relation to IR35 may be defined by a contract you aren't party to and haven't seen - hardly fair.

[PhilAtBFCA]

Peoplesoft bloke

There's the rub. Your status in relation to IR35 may be defined by a contract you aren't party to and haven't seen - hardly fair.

Agreed, it does seem unfair.

The best protection you can try and aim for , IMHO, is

1. a letter to your agency confirming your understanding of the Substitution caluse, and requesting their confirmation that there is nothing in their contract with the client that is inconsistent with the terms between your company and them.
2. a letter to your client confirming your understanding of the working arrangements and asking for their confirmation


Phil