Complex IR35 issue

[polarbearuk75]

I'd welcome people's thoughts on this situation. A colleague of mine has experienced the following:

1. They joined a well-known UK-based international company as a senior interim director, covering a long-term absence. The role was 3–4 days a week at £X per day.
2. This person has run multiple businesses for over 10 years, with staff, a website, and other infrastructure. They pay themselves via PAYE through one of their own companies.
3. The role was meant to be a short-term change for 6–9 months, and it was well-paid. However, it has since turned into a nightmare.
4. They signed a contract specifying that they were operating outside IR35, with clear terms stating they were responsible for their tax and National Insurance (NI). They think they are outside IR35.
5. Had they been told it was inside IR35, they would not have accepted the role - or with a MUCH higher day rate, which we suspect they would unlikely not have accepted anyway.
6. Recently, it has come to light that the company has received no professional advice when setting up these contracts. They had many other contractors engaged but weren’t managing IR35 compliance correctly.
7. After an internal audit, the company panicked, consulted a lawyer, and was advised that all contractors should be classified as "inside IR35"—regardless of individual circumstances. They only found out 2 weeks ago.
8. However, four months ago, the company stopped paying all contractors, including my colleague. With no clear reason why. Its possible they have known about this for a while, but were working out what to do. Most contractors left after a month of non-payment, but a few, including my colleague, stayed. They are now owed four months' pay, plus three months' notice as stipulated in their contract.
9. Subsequently, contractors who stayed on were told their contracts were being terminated, with no payments due because the funds were being sent to HMRC. Access to company systems was cut off without notice.
10. The company’s lawyers were aggressive and abusive. They advised contractors to pursue the matter in court if they disagreed, asserting that it was not the company’s responsibility.
11. After consulting our lawyer and accountant, we've realised this issue goes beyond their expertise, so we are all researching possible solutions.

My thoughts

• I don't think the company should be able to retroactively reclassify contractors inside IR35 and refuse payment. If it fails to manage IR35 compliance correctly, it is responsible for any back payments of Tax and NI. If necessary, it should terminate the existing contract and offer a new one under IR35, likely with a higher rate and employment rights, including holiday pay.
• If my colleague is found to be inside IR35, they would presumably be entitled to employment rights. Withheld wages, lack of holiday pay, and absence of other employment benefits could breach those rights. Question is which approach is now better - we think its outside, they think inside - and nothing will now change their mind. Learned that lesson myself the hard way.
• Does anyone know of a specialist IR35 accountant/lawyer who could advise?

This appears to be an interesting tactic for companies to hire contractors outside IR35 terms without paying employment costs, only to later "reclassify" and withhold monies. It's cheaper for them. I don't think this has been done on purpose, but I could have been, and then you have David vs Goliath to try and sort it out. They hope you will walk away. It’s a cautionary tale: if you aren’t paid for several weeks, it’s best to walk away and not let it build up. Unfortunately, that didn’t happen, and my colleague is now in a difficult position.

I'd appreciate any comments or advice on how to handle this situation.

Thanks

[WTFH]

However, four months ago, the company stopped paying all contractors, including my colleague. ... but a few, including my colleague, stayed. They are now owed four months' pay.

I'd appreciate any comments or advice on how to handle this situation.

Thanks

This is the most important piece. A contractor worked for 4 months unpaid and didn't question why, and didn't walk away.
Everything else is peripheral, including your claims.

The interesting "tactic" is your focus on IR35, not on failure to pay.

[polarbearuk75]

I agree - and i most likley would have walked into the 2nd month.

In this context, the accounts department was doing the usual—blaming holidays, delays, and so on. It wasn’t as though no follow-ups were being done. Also, walking away from a contract with a three-month notice period is risky; where do you draw the line without risking a lawsuit?

[eek]

I agree. In this context, the accounts department was doing the usual—blaming holidays, delays, and so on. It wasn’t as though no follow-ups were being done. Also, walking away from a contract with a three-month notice period is risky; where do you draw the line without risking a lawsuit?

Why would you have three months notice on an outside IR35 contract?

One thing that (used to) make a contract outside is lack of mutual obligation.

I read the original post and thought it was inside from the job title to begin with anyway

[northernladuk]

1. They joined a well-known UK-based international company as a senior interim director, covering a long-term absence. The role was 3–4 days a week at £X per day.
2. This person has run multiple businesses for over 10 years, with staff, a website, and other infrastructure. They pay themselves via PAYE through one of their own companies.
3. The role was meant to be a short-term change for 6–9 months, and it was well-paid. However, it has since turned into a nightmare.

Firstly, from what I understand, a director or non exec director can't be outside IR35. They are classed as an office holder. It's complex but there is case law Great Western Railway Company v Bater 8TC231 and Edwards v Clinch 56TC367 defines what an office is and it's something along the lines of 'a post need not be capable of permanent or prolonged existence but it must have an endurance at least beyond the tenure of one man' so there is an office and the person filling that role is considered an office holder. There is then the discussion about a controlling person and then there is the issue of him filling in for a perm. He's just a temp, not providing a service.

Sounds inside IR35 all day long to me.

1. They signed a contract specifying that they were operating outside IR35, with clear terms stating they were responsible for their tax and National Insurance (NI). They think they are outside IR35.
2. Had they been told it was inside IR35, they would not have accepted the role - or with a MUCH higher day rate, which we suspect they would unlikely not have accepted anyway.

Did he not get his contract, and more importantly his working practices reviewed? The contract won't specify IR35 specifically, the terms within it will. From the terms and the working practices you can determine it's outside. Just taking the outside IR35 statement has always been a waste of time.

And in the new world the above doesn't even mean anything. Did he get an SDS? If not, why not? As a company owner it's also his responsibility to make sure he engages properly. Sounds very strange a company director going contracting doesn't know anything about an SDS. It's part of process of being a contractor now.

1. Recently, it has come to light that the company has received no professional advice when setting up these contracts. They had many other contractors engaged but weren’t managing IR35 compliance correctly.
2. After an internal audit, the company panicked, consulted a lawyer, and was advised that all contractors should be classified as "inside IR35"—regardless of individual circumstances. They only found out 2 weeks ago.

Not unheard of in the old days, but pretty rare in this day and age with the responsibility now sitting with the fee payer (client). I am finding it hard to believe a large well know international UK company know nothing about their responsibilities when engaging contractors.
IR35 compliance is also a responsibility of the contractors. You shouldn't be taking gigs if you haven't done your diligence first. A good contract review and chat with people like QDOS should have at least got the contractors focussed enough to take the client to task. Something not right here.

That advice from the lawyer (i believe) is illegal as IR35 status should be on each position. I thought blanket bans are illegal so something wrong with that classification. They can refuse to deal with LTD contractors and push everyone on to umbrellas which skirts the issue of a determination so bypassing that rule but a statement classifying all contractors 'inside' I thought was bad.

1. However, four months ago, the company stopped paying all contractors, including my colleague. With no clear reason why. Its possible they have known about this for a while, but were working out what to do. Most contractors left after a month of non-payment, but a few, including my colleague, stayed. They are now owed four months' pay, plus three months' notice as stipulated in their contract.

This situation is just getting stranger and stranger. Who stays at a client that hasn't paid them for four months and no excuse.

Also majory IR35 blooper alert. You are not owned three months notice period. You are owed what worked. Notice periods are irrelevant for contractors. You don't know this? The 'director' doesn't know it?.... Hmmmmmm

[quote]

1. Subsequently, contractors who stayed on were told their contracts were being terminated, with no payments due because the funds were being sent to HMRC. Access to company systems was cut off without notice.
2. The company’s lawyers were aggressive and abusive. They advised contractors to pursue the matter in court if they disagreed, asserting that it was not the company’s responsibility.
3. After consulting our lawyer and accountant, we've realised this issue goes beyond their expertise, so we are all researching possible solutions.

[quote]
Terminated with no pay, funds sent to HMRC? What are you doing talking to the clients lawyers? Your lawyer doesn't have the expertise to deal with a basic contract breach???

Now I'm sorry and it's possible this is exactly how it went down but the longer that went on, the more made up it sounded. If one or two lines hadn't made sense I'd get it but it's a common theme through the whole thread. It's just too unbelievable.

• I don't think the company should be able to retroactively reclassify contractors inside IR35 and refuse payment. If it fails to manage IR35 compliance correctly, it is responsible for any back payments of Tax and NI. If necessary, it should terminate the existing contract and offer a new one under IR35, likely with a higher rate and employment rights, including holiday pay.
• If my colleague is found to be inside IR35, they would presumably be entitled to employment rights. Withheld wages, lack of holiday pay, and absence of other employment benefits could breach those rights. Question is which approach is now better - we think its outside, they think inside - and nothing will now change their mind. Learned that lesson myself the hard way.

With the new SDS's the client can change determination anytime up the first payment whcih could be a month or two after starting. It's happened to people on here. Not after the payment though but you've not mentioned SDS so who knows what they are doing.

No he isn't. Inside IR35 doesn't mean perm sadly. It's a contract with the tax handled differently which is different to being a perm. It's hard to put in a paragraph as there are situations where you could use employment tribunals and there is some case law but it's complex. This article discusses it

https://www.contractorcalculator.co....nt_rights.aspx

But does go on to say..

“It’s important that the prospect of success be considered based on the reality of the engagement,” notes Wilson. “For example, if the client has simply deemed a strong contract for services to be ‘inside IR35’ in order to negate any potential tax liability risk, the contractor should expect to fail as the ET would pick up on the true nature of the engagement

which is exactly what's happened here so will be an utter nightmare to unpick.

• Does anyone know of a specialist IR35 accountant/lawyer who could advise?

If he didn't have insurance, which I'm assuming he didn't reading all this then it's gonna cost more than 4 months pay to fight it. Speak to QDOS.

This appears to be an interesting tactic for companies to hire contractors outside IR35 terms without paying employment costs, only to later "reclassify" and withhold monies. It's cheaper for them. I don't think this has been done on purpose, but I could have been, and then you have David vs Goliath to try and sort it out. They hope you will walk away. It’s a cautionary tale: if you aren’t paid for several weeks, it’s best to walk away and not let it build up. Unfortunately, that didn’t happen, and my colleague is now in a difficult position.

This is exactly what HMRC has been arguing all along and is why the massive shift to inside has happened. When the legislation hit there was mayham while everyone was re-classified. I don't think it's a tactic now at all. If they aren't issuing SDS's they are breaking the law.

I'd appreciate any comments or advice on how to handle this situation.

I'd say your friend is gonna have to suck this one up and classify it as newbie tax. If he's a senior director, didn't do proper diligence on the contract, didn't understand the legislation that is his business and then didn't walk away after four weeks then I'm sorry. He's only got himself to blame.

[northernladuk]

If this guy is such a high flying business man on director level contract rates how come he's not sorting it himself?

[northernladuk]

And to add something useful, this should be a simple breach of contract. They didn't pay for the time worked as per the contract. You shouldn't need to go down the IR35 route. That's just how the monies are taxed. It does open a can of worms as to what the director does with the money, pay the full tax as a sole trader or an employee (yes) or have it paid in to his company and worry about an IR35 investigation later on.

[polarbearuk75]

Let's just say the person in question reached out to me for some advice, as they know I contract. I honestly did not have the answer as I had never encountered this before. Sadly, since the IR35 came into play, I have been Inside-IR35 for the last X years as work in banking (IT)

After X years of running his own business, he wanted a change and so took on this role, when he was approached.

His mental health on the back of this has massively declined. I am just trying to do the right thing as a friend to get some answers and support him.

It is easy sometimes to pretend everything is ok - but sometimes it is not. I could easily have written this as myself, but I did not. Sorry, I was just after some advice.

[Cookielove]

Sounds curiouser and curiouser ....as soon as they didn't pay after a month they should've left.

A high flyer would be more savvy...it seems very odd set of circumstances.

[polarbearuk75]

Firstly, from what I understand, a director or non exec director can't be outside IR35. They are classed as an office holder. It's complex but there is case law Great Western Railway Company v Bater 8TC231 and Edwards v Clinch 56TC367 defines what an office is and it's something along the lines of 'a post need not be capable of permanent or prolonged existence but it must have an endurance at least beyond the tenure of one man' so there is an office and the person filling that role is considered an office holder. There is then the discussion about a controlling person and then there is the issue of him filling in for a perm. He's just a temp, not providing a service.

Sounds inside IR35 all day long to me.

He was a director - but not on paper - had to go via company lawyer to all corporate decisions back to board.

Did he not get his contract, and more importantly his working practices reviewed? The contract won't specify IR35 specifically, the terms within it will. From the terms and the working practices you can determine it's outside. Just taking the outside IR35 statement has always been a waste of time.

And in the new world the above doesn't even mean anything. Did he get an SDS? If not, why not? As a company owner it's also his responsibility to make sure he engages properly. Sounds very strange a company director going contracting doesn't know anything about an SDS. It's part of process of being a contractor now.

No, and that was his mistake for not following it thought - the last time he did this was in the good old days, and honestly, it did not occur to him. In his other businesses, everyone is PAYE - no contractors.

Not unheard of in the old days, but pretty rare in this day and age with the responsibility now sitting with the fee payer (client). I am finding it hard to believe a large well know international UK company know nothing about their responsibilities when engaging contractors.

Let's say it's a well-known brand - and yes - they had no idea at all from what I can see.

I

R35 compliance is also a responsibility of the contractors. You shouldn't be taking gigs if you haven't done your diligence first. A good contract review and chat with people like QDOS should have at least got the contractors focussed enough to take the client to task. Something not right here.

100% and I always do mine with QDOS - had he asked me I would have told him but was after the event.

That advice from the lawyer (i believe) is illegal as IR35 status should be on each position. I thought blanket bans are illegal so something wrong with that classification. They can refuse to deal with LTD contractors and push everyone on to umbrellas which skirts the issue of a determination so bypassing that rule but a statement classifying all contractors 'inside' I thought was bad.

Sorry, the lawyer was the client's internal lawyer who said this - not ours.

This situation is just getting stranger and stranger. Who stays at a client that hasn't paid them for four months and no excuse.

Also majory IR35 blooper alert. You are not owned three months notice period. You are owed what worked. Notice periods are irrelevant for contractors. You don't know this? The 'director' doesn't know it?.... Hmmmmmm

Sorry, your correct language in the contract is under the "termination of the services" clause of 3 months.

1. Subsequently, contractors who stayed on were told their contracts were being terminated, with no payments due because the funds were being sent to HMRC. Access to company systems was cut off without notice.
2. The company’s lawyers were aggressive and abusive. They advised contractors to pursue the matter in court if they disagreed, asserting that it was not the company’s responsibility.
3. After consulting our lawyer and accountant, we've realised this issue goes beyond their expertise, so we are all researching possible solutions.

Terminated with no pay, funds sent to HMRC? What are you doing talking to the clients lawyers? Your lawyer doesn't have the expertise to deal with a basic contract breach???

We have not yet responded to the clients lawyers hence why asking the questions. He wanted some advice before instructing his.

Now I'm sorry and it's possible this is exactly how it went down but the longer that went on, the more made up it sounded. If one or two lines hadn't made sense I'd get it but it's a common theme through the whole thread. It's just too unbelievable.

Sorry - let me be clear.

friends lawyer / accountant not experts in IR35 they understood the basics but had not seen this happen before, and so their view was a breach of contract and go that direction.

However, the client's lawyer wrote an email saying the supplier is now inside and any outstanding monies will be paid to HMRC to cover Tax and NI, so no breach has occurred, etc as no money is owed. if we had a problem with it take it up with HMRC.

if he accepts it was insideIR35, then he has employment rights, which they have then breached, but then there is no idea how we can sort out the Tax and NI AFTER the event.

There has been no mention of going via an umbrella from clients; I honestly don't think they know that is the normal approach and not that they handle these themselves.

I agree that this sounds unbelievable, which is why I am looking for information. I can assure you that, from what I have read, this is what has happened.

[B][/LIST]With the new SDS's the client can change determination anytime up the first payment whcih could be a month or two after starting. It's happened to people on here. Not after the payment though but you've not mentioned SDS so who knows what they are doing.

No he isn't. Inside IR35 doesn't mean perm sadly. It's a contract with the tax handled differently which is different to being a perm. It's hard to put in a paragraph as there are situations where you could use employment tribunals and there is some case law but it's complex. This article discusses it

https://www.contractorcalculator.co....nt_rights.aspx

But does go on to say..


which is exactly what's happened here so will be an utter nightmare to unpick.[/LIST]If he didn't have insurance, which I'm assuming he didn't reading all this then it's gonna cost more than 4 months pay to fight it. Speak to QDOS.

[/QUOTE]

ok - will give QDOS a call.

This is exactly what HMRC has been arguing all along and is why the massive shift to inside has happened. When the legislation hit there was mayham while everyone was re-classified. I don't think it's a tactic now at all. If they aren't issuing SDS's they are breaking the law.

I'd say your friend is gonna have to suck this one up and classify it as newbie tax. If he's a senior director, didn't do proper diligence on the contract, didn't understand the legislation that is his business and then didn't walk away after four weeks then I'm sorry. He's only got himself to blame.

Thank you for the detailed response. There is some helpful information there.