IR35 Tax Net
The IR35 Tax net is a nightmare for contractors who don’t know if they are inside IR35 or not. It causes many a sleepless night especially as it is contract-by-contract based and not individual based. We asked an expert to let our readers know how to prove they are not inside the IR35 tax net.
Article By David Greene.
Defending an IR35 investigation.
David Greene successfully handles many IR35 investigations for freelance workers. Here he explores the issue of the intentions of the parties to the contract as to what type of relationship they want. This is a critical point in defending IR35.
Whilst many other factors in determining an employment relationship are headlined in industry press, this lesser publicised issue is of great importance.
Some of the greatest judges of the English legal system have set out that the intentions of the parties can be a critical factor in determining the nature of the relationship.
IR35 – Intentions of the Parties
One of the very greatest, Lord Denning in Massey v Crown Life Insurance 1978 stated:
“The law, as I see it, is this: If the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label upon it.
“On the other hand, if their relationship is ambiguous and is capable of being one or the other, then the parties can remove that ambiguity, by the very agreement itself which they make with one another. The agreement itself then becomes the best material from which to gather the true relationship between them.”
Whilst the nature of IR35 is ambiguous, as it looks at a hypothetical relationship, clearly setting out that a relationship of employment is not present between the parties does remove ambiguity.
This should be a starting point for all contract negotiations for those not wanting to fall within IR35.
IR35 Employment Relationship
For those that work in the industry it is simply common sense that the end clients do not want an employee. They don’t want an employment relationship created. Otherwise they would recruit a ‘permie’.
You must back up this common sense thought with strong contract documentation. It should reflect in the working relationship of the contractor and end client.
Setting out the intentions of the parties is the initial framework that the contractor, client and agency must start with and build the contract around.
When a contract is investigated for IR35, the starting point of the defence is to find out what relationship the parties wanted and what conditions have then been put in place to reflect this. This includes contractual and working characteristics.
HMRC – Employer and Contractor
HMRC often claim that the intentions of the parties, is not for consideration. However there is plenty of further precedent to outweigh that argument.
In another leading case, McCullough J in Swan (Hellenic) Ltd v Secretary of State for Social Security [1983] QB (18 January, unreported):
“Clearly, the greater the court’s confidence in the bona fides of the parties the greater must be the significance which attaches to a clear expression of intention that the relationship would be that of employer and independent contractor.”
In this case the judge went through a checklist of 10-11 items in determining the relationship between the parties. He found none of them decisive. He concluded, in the end, that the factor of major significance was the intention of the parties. This is deduced from the terms which they agreed on tax and national insurance.
IR35 Terms of Agreement
Lord Justice Lawton in Massey v Crown Life Insurance went one step further and stated:
“It is clearly established that the parties cannot change a status merely by putting a new label on it. But if in all the circumstances of the case, including the terms of the agreement, it is manifest that there was an intention to change status, then in my judgment there is no reason why the parties should not be allowed to make the change.”
This case illustrates that a false term to a contract is not worth the ink that it is printed in. But that the real intentions of the parties as to the relationship they intended is to be considered. That’s even if they change the status of their relationship.
In the contracting industry, this supports the position that just because someone accepts a permanent position with the same end client, it does not mean that the previous contract work for that client is under a contract of employment and subject to IR35.
Brabin v Barnett 1996
Perhaps the most significant employment case decided on the intentions of the parties was Brabin v Barnet 1996.
In this case HMRC successfully argued that a worker was self employed. One of their three principle points, they argued, was that when they set up the relationship with the client, the intention was self employment.
The judge held that what the parties intended as an extremely important factor to take into account!
The end users of contract freelance workers are with very little exception completely against an employment relationship with the freelancer.
IR35 Tax Net – Employment Relationship
They are also now very quick to support any of their contractors who are arguing against an employment relationship (and its attached taxes). You should bring them on board as early as possible if HMRC are claiming an effective employment relationship.
It is important that the contractor and end user open a dialogue to present their position against an employment relationship.
This would be difficult for HMRC to overcome. It may also have the added benefit of making the contractor a more valuable supplier to the end client. That’s because they have distanced themselves from any spurious employment claims.
We hope you found this article useful about how to stay out of the IR35 tax net.
See 18 Ways Contractors Can Stay Outside IR35
