Reply to: Personal services company? need help...

[Wanderer]

Wanderer, apologies if I have misunderstood your post, but I'm assuming you meant a 6 month contract to supply services and not a fixed term contract (which would be a fixed term contract of employment with you as a PAYE employee of the end client)?

Sorry to be unclear, I'm talking about a typical contract where a worker trading as a LTD company is engaged by a client for a period of 6 months and they are considering their IR35 status. If this was a fixed term contract on PAYE then the question of IR35 wouldn't arise.

[Blackdog]

QDOS clearly pointed out that tax tribunals don't set a legal precedence. This can be interpreted as HMRC will choose it's arguments to suit the particular contractor and contract(s) in dispute. In other words they will argue away what doesn't suit them.

We know that tax tribunals don't set legal precedent; my point was that despite legal precedent (where Mr Justice Lightman considered the notice clause neutral in the case Lisa cited), HMRC does not choose to treat this issue as neutral. As you said, HMRC will choose its arguments accordingly.

[SueEllen]

But it isn't as QDOS is saying.

QDOS clearly pointed out that tax tribunals don't set a legal precedence. This can be interpreted as HMRC will choose it's arguments to suit the particular contractor and contract(s) in dispute. In other words they will argue away what doesn't suit them.

[northernladuk]

HMRC would turn it around and argue that's a neutral point as in employment contracts the employee can give notice as well.

But it isn't as QDOS is saying.

[SueEllen]

What about the argument that giving notice periods is good for both parties to be able to get yourself out of contract as either a supplier or a customer. For example, we have notice periods on stuff such as mobile phone contract and my mobile phone contract isn't an indication I am a permie.

HMRC would turn it around and argue that's a neutral point as in employment contracts the employee can give notice as well.

[northernladuk]

What about the argument that giving notice periods is good for both parties to be able to get yourself out of contract as either a supplier or a customer. For example, we have notice periods on stuff such as mobile phone contract and my mobile phone contract isn't an indication I am a permie.

[Qdos Contractor]

OK, that's great stuff and clarifies it a bit.

Can you rate these scenarios from an IR35/MOO point of view. Let's presume this is a 6 month fixed term contract and these clauses relate to a potential early termination of the contract.

1. Either the client or contractor company can terminate the fixed term contract by giving 30 days notice.

2. The client can terminate immediately and without reason but contractor company must give 30 days notice.

3. Client can terminate immediately and without reason but contractor company cannot terminate the contract and must supply services for the full duration of the fixed term contract.

HMRC would probably seek to argue that MOO exists in each of the scenarios. Where only one party can terminate without notice it still leaves the other party obligated. Where the contractor therefore serves notice and has to provide their services during this time then the end client will be obligated to pay for those services thus fulfilling the ‘irreducible minimum’.

Where only the end client has the right to immediate termination for whatever reason then this does expose the contractor to a real financial risk that would be uncommon to an employee.

[Qdos Contractor]

Thanks for taking the time to reply. I have read as much case law as I can find on this, including the case kindly cited by Lisa. Although I don't disagree with your comments re notice periods being a neutral factor; one or two recent cases have shown that this can be a decisive factor in winning an IR35 dispute, and that it isn't always treated as a neutral issue by HMRC.

I thought the HMRC vs MBF (with Airbus as end client) case was particularly interesting:

"The third contract between Morson and Airbus also included a clause setting out the client’s right to immediate cancellation of the contract, which was crucial to the tribunal’s decision that the terms were inconsistent with the mutuality of obligation that exists between employee and employer."

The full appeal decision is here: MBF Design Services Ltd v Revenue & Customs [2011] UKFTT 35 (TC) (05 January 2011)

My conclusion is that, as long as the end client can terminate the contract without notice, there is no extra harm in my LTD having a right to terminate the contract via a notice period.

Having no notice period, i.e. the right to immediate termination of a contract is clearly more desirable in terms of arguing IR35 but even HMRC’s ESM0546 states: ‘Equally, the absence of such a power would not point conclusively towards self-employment.’ This alone however would not be sufficient to successfully argue that a contract was one for services.

Whilst Tax Tribunal decisions are helpful and can be referred to they do not set legal precedence unlike decisions made in the higher courts.

[7specialgems]

Sorry, if this has been posted earlier.. i couldn't find it on the forum.

Funny, that.

[Blackdog]

OK, that's great stuff and clarifies it a bit.

Can you rate these scenarios from an IR35/MOO point of view. Let's presume this is a 6 month fixed term contract and these clauses relate to a potential early termination of the contract.

1. Either the client or contractor company can terminate the fixed term contract by giving 30 days notice.

2. The client can terminate immediately and without reason but contractor company must give 30 days notice.

3. Client can terminate immediately and without reason but contractor company cannot terminate the contract and must supply services for the full duration of the fixed term contract.

Wanderer, apologies if I have misunderstood your post, but I'm assuming you meant a 6 month contract to supply services and not a fixed term contract (which would be a fixed term contract of employment with you as a PAYE employee of the end client)?

[Wanderer]

Although notice periods should be considered as a neutral factor because of the the judges comments in the above case they do have an impact on MOO especially if a notice period is a lengthy one. Where there is a long notice period then it would be difficult to argue against obligations existing between the two parties. Even with a 30 day notice period HMRC may seek to argue that this indicates MOO is present within the contract.

OK, that's great stuff and clarifies it a bit.

Can you rate these scenarios from an IR35/MOO point of view. Let's presume this is a 6 month fixed term contract and these clauses relate to a potential early termination of the contract.

1. Either the client or contractor company can terminate the fixed term contract by giving 30 days notice.

2. The client can terminate immediately and without reason but contractor company must give 30 days notice.

3. Client can terminate immediately and without reason but contractor company cannot terminate the contract and must supply services for the full duration of the fixed term contract.

[Blackdog]

Firstly, the quote from us regarding notice periods is out of date; I need to locate it and update.

... text removed ...


Although notice periods should be considered as a neutral factor because of the the judges comments in the above case they do have an impact on MOO especially if a notice period is a lengthy one. Where there is a long notice period then it would be difficult to argue against obligations existing between the two parties. Even with a 30 day notice period HMRC may seek to argue that this indicates MOO is present within the contract.

Thanks for taking the time to reply. I have read as much case law as I can find on this, including the case kindly cited by Lisa. Although I don't disagree with your comments re notice periods being a neutral factor; one or two recent cases have shown that this can be a decisive factor in winning an IR35 dispute, and that it isn't always treated as a neutral issue by HMRC.

I thought the HMRC vs MBF (with Airbus as end client) case was particularly interesting:

"The third contract between Morson and Airbus also included a clause setting out the client’s right to immediate cancellation of the contract, which was crucial to the tribunal’s decision that the terms were inconsistent with the mutuality of obligation that exists between employee and employer."

The full appeal decision is here: MBF Design Services Ltd v Revenue & Customs [2011] UKFTT 35 (TC) (05 January 2011)

My conclusion is that, as long as the end client can terminate the contract without notice, there is no extra harm in my LTD having a right to terminate the contract via a notice period.

[malvolio]

Although notice periods should be considered as a neutral factor because of the the judges comments in the above case they do have an impact on MOO especially if a notice period is a lengthy one. Where there is a long notice period then it would be difficult to argue against obligations existing between the two parties. Even with a 30 day notice period HMRC may seek to argue that this indicates MOO is present within the contract.

Whic is precisely the point I've been making for the last few years...

[Qdos Contractor]

Firstly, the quote from us regarding notice periods is out of date; I need to locate it and update.

Lisa is quite right to cite the judges comments in the 1997 case of McManus v Griffiths.

The vast majority of contracts that I see all have notice periods contained within them because they serve a commercial purpose, e.g. they allow time for the work to be brought to a satisfactory conclusion and any hand over to be made smoothly. Where there is early termination of the contract, a notice period could act as a form of compensation to the contractor for cancellation of a trading contract. Such receipts are recognised as trading income and can even be considered to be capital receipts if one contract is so dominant that it accounts for substantially the whole of a company's income.

In the main, however, most contractors who have had notice served upon them will be receiving money in return for services during that period of notice.

Where notice is served and the contractor simply paid for doing no work at all then there is a danger that this could be seen to be payment in lieu of notice (PILON). PILONs are associated with employment and the proper tax treatment is to tax such as employment income. Clearly that would not be helpful.

Although notice periods should be considered as a neutral factor because of the the judges comments in the above case they do have an impact on MOO especially if a notice period is a lengthy one. Where there is a long notice period then it would be difficult to argue against obligations existing between the two parties. Even with a 30 day notice period HMRC may seek to argue that this indicates MOO is present within the contract.

[Wanderer]

It would be good if someone from Qdos could post on here to clarify.

Along with a reference to case law rather than just an opinion too....