The Potted Guide to IR35

[UKFF Mod]

This is not and does not claim to be a definitive guide to IR35 and how to avoid its clutches. That is something that has defeated many experts over the last ten years. However, I hope to provide a summary of what we do know about IR35, what all the arcane acronyms really mean, and which bits are the important ones.

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If you have any comments to make about this article feel free to start the debate below!

[CrazyMoose]

Succinct yet comprehensive, informative and easily understood. Let's not get emotional, but that is one of the best summaries i've seen on IR35.

Congrats...

[PhilAtBFCA]

Thanks Alan,

A great summary of IR35 and what to look out for.

Phil

[David Harmer]

Having read the article and giving regard to the heading that it is not a definitive guide, I do agree the three fundamentals of IR35 are Substitution, Mutuality and Control however this is as much as I agree with. While I admire the intention to provide a simplistic article on IR35, quite frankly IR35 is not overly “simple” and as such the principles cannot be so easily categorised.

Right of Substitution – the actual test, often misidentified by HMRC, is a lack of personal service. Basically are you obliged to provide the work yourself? A lack of personal service can be demonstrated by a right to send someone else in your place (a right of substitution). The courts have confirmed that a not unreasonably fettered right of substitution will satisfy a lack of personal service.

The clause “you may send a substitute subject to approval of the client, such approval not to be unreasonably withheld” is not sufficient. This clause gives the client outright veto on a substitute. An adequate right of substitution must direct itself to the need for skills or qualifications simply stating “not unreasonably withheld” will not suffice, reasonableness is subjective so effectively the client can say no for whatever reason it likes – reasonableness must be attributable to skills or qualifications otherwise the courts will not regard it as a genuine right of substitution, and HMRC will certainly not entertain the argument.

Control, in simplest terms goes to “how” the work is completed. Essentially an employee is someone who is subject to control as to how he provides services. The case law precedent is a sufficient degree of control to make one party [the worker] a servant of his master [the client].

The comments in the article regarding control have no founding in case law. Basically, having been given the job specification are you told how to complete it? This is not simply what the client requires, where it needs to be done and when it is completed by, but literally can they tell you “how” you must complete the day to day work.

Mutuality of obligation is complex and is recognised as such by the courts. However the House of Lords have held Mutuality is categorised as an obligation on the work provider to offer work and an obligation on the work doer to accept work. The phrasing has been somewhat distorted by some IR35 judgements, however it is not merely “no work, no pay”.

The Dragonfly judgment has received much press and a lot of scaremongering resulted from this judgment, it must be remembered however in this case substitution was fettered and the contract was not suitably drafted prior to commencement of the services. At the time the Dragonfly case was decided by the special commissioners another case First Word Software was also decided and had a very different conclusion (perhaps largely due to the fact the contract was decently worded).

On a final note, and unfortunately it is not good news for contractors, when you consider the IR35 judgements laid down by the Commissioners and High Court the actual success rate for IR35 contractors is less than 50% - for the anally retentive, of which I am one, taken the total cases heard by the Special Commissioners and High Court to date the figures are 37% success rate, and 64% going in favour of HMRC.


As an aside in the interests of fairness taking out the cases Accountax have represented at the Commissioners, the figures are then 22% success rate to the tax payer 78% in favour of HMRC, , for those who are interested (and perhaps me being shamelessly arrogant!) Accountax own success rate is 57% in favour of the tax payer and 43% in favour of HMRC :-)

[Malvolio]

I did say it was a simplistic analysis and that there is a lot more further reading to be done. I was merely aiming to highlight the key elements and dispel a couple of myths, not provide a fully legalistic definiton of each of the terms and their representation in the resultant contract. For that I would refer people to sources such as PCG's Guide to IR35 or even your owns ite's summation: I possibly wouldn't suggest they go read the many reports of the assorted cases that I (and no doubt you) have done.

The idea was to make people think, not answer all the questions. I get really worried about people saying they are inside IR35 because of things like they have to use the client's laptop on a secure site, or be at work during core hours when they are doing 2nd line support. Or they aren't becase they have two contracts.

I am intrigued by your IR35 figures, which are in flat contravention of accepted wisdom. I think you and PCG need to have a conversation about them, since they will have a significant impact on some ongoing work in PCG Towers.

[wattaj]

Originally Posted by David Harmer

On a final note, and unfortunately it is not good news for contractors, when you consider the IR35 judgements laid down by the Commissioners and High Court the actual success rate for IR35 contractors is less than 50% - for the anally retentive, of which I am one, taken the total cases heard by the Special Commissioners and High Court to date the figures are 37% success rate, and 64% going in favour of HMRC.

As an aside in the interests of fairness taking out the cases Accountax have represented at the Commissioners, the figures are then 22% success rate to the tax payer 78% in favour of HMRC, , for those who are interested (and perhaps me being shamelessly arrogant!) Accountax own success rate is 57% in favour of the tax payer and 43% in favour of HMRC :-)

David, do you think that you could post the raw numbers for wins v's losses for cases both before they reach the Commissioners/High Court and after?
I'm naturally wary of percentages and feel that we need to keep things in perspective...
AFAIAA, the vast majority of cases are won in favour of the contractor before they ever reach the Commissioners.
The casual observer might be forgiven for thinking that things look a lot bleaker than they are in real life.

[Malvolio]

WHS.

The win/lose ratios are those that reach the courts, most never get that far. Neverthess, some real numbers rather than percentages would be more useful, if anyone has them.

And as a further aside, ISTR most of the losses weere cases where the contractor did not have professional representation from the outset and made fatal flaws in their defence. Dragonfly was, as I said earlier, a bit of an anomaly. The other recent appeal resulted in the whole case being restarted under the new tribunal regime, and this time will be fully represented from the outset. That might well prove interesting.

[TheFear]

Originally Posted by wattaj

David, do you think that you could post the raw numbers for wins v's losses for cases both before they reach the Commissioners/High Court and after?
I'm naturally wary of percentages and feel that we need to keep things in perspective...
AFAIAA, the vast majority of cases are won in favour of the contractor before they ever reach the Commissioners.
The casual observer might be forgiven for thinking that things look a lot bleaker than they are in real life.

I'm also curious about the numbers we're talking about here. I think the before Commissioners/High Court is probably the more important number. Most of us already know (or should know) the wins vs losses once they reach court - this information is widely available in the public domain.

I was told that the PCG used to report these figures on their website but I can't find them now. Is that a deliberate tactic due to the uncertainty surrounding the numbers, or perhaps something else?

TF

[Malvolio]

Originally Posted by TheFear

I'm also curious about the numbers we're talking about here. I think the before Commissioners/High Court is probably the more important number. Most of us already know (or should know) the wins vs losses once they reach court - this information is widely available in the public domain.

I was told that the PCG used to report these figures on their website but I can't find them now. Is that a deliberate tactic due to the uncertainty surrounding the numbers, or perhaps something else?

TF

The numbers are out of date: they were gleaned from a variety of sources and need updating. There's no reason to believe the actual win/loss ratio has changed, but it would be nice to confirm it.

[TheFear]

Originally Posted by Malvolio

The numbers are out of date: they were gleaned from a variety of sources and need updating. There's no reason to believe the actual win/loss ratio has changed, but it would be nice to confirm it.

ok thanks Malvolio. I am keen to see these win / loss numbers.

TF