Contract clauses: Ask Andy Answers

This week one of your questions for Head of Tax, Andy Vessey, acts as a sort of case study on what aspects of a contract point to self-employment for IR35 and which ones don’t matter. It’ll prove a reassuring read for many we hope.

Read on after the questions to find out how you can submit your own IR35 question to Andy.

I have a question but I’ll try to provide a brief background first. Since starting in 2005, I work as a VAT registered Ltd company providing extremely niche Electrical Control System Designs to Process Plant companies and special-purpose-machinery OEM’s. I also occasionally supply small control panels which I design, build and install. 

On the whole, I undertake fixed price projects for which I quote. I used to rent a small office however over the past three or four years I’ve reverted to working from home in a dedicated converted office space. I (my limited company), own all of my laptops, desktop computers and costly specialist CAD software and tools. I manage my own time, sometimes running multiple projects simultaneously. I have for many years continually substituted work out to two very select sub-contractors however, for various reasons over the past couple of years I haven’t needed to do this, apart from on odd occasions. That’s pretty much the background.

This leads me to my question. I receive regular orders from one particular repeat customer based 150 miles away (they have 50+ employees) where I provide design-only services. This customer is a regional office of a major blue chip global engineering group. Based on the complexity, and for the most, the ‘unknown factor’ of what will be involved uncovered with some of these projects, it’s impossible to provide a fixed price quotation that’s within an acceptable level of financial risk, so I generally insist on an hourly rate throughout for which I receive an ‘open’ PO. Some of these projects last up to 6-8 weeks whereby I submit an end of month invoice for the accrued hours. Incidentally, my invoices are subject to 30-day payment terms and professionally written T&C’s. As explained above, these days I pretty much keep the work for myself, not really sub-contracting any of it out but for this particular customer I can easily demonstrate that I have in the past substituted sub-contractors where they have often liaised with this specific customer of mine. There is also an invoice trail to demonstrate this.

With regards to this typical project work carried out, I’d be most interested in your opinion for how it sits with being outside of IR35. I’m fairly comfortable that I’m outside IR35 however the hourly-rate charging keeps me wondering. I hope I haven’t bombarded you with too much information however I thought it was worth painting the full picture.

I agree with your conclusion that your contract with this client appears to fall ‘outside’ IR35. There appears to be very little control over the manner in which you deliver the services by your client and your own personal service is not a feature of the contract as you have previously sub-contracted some of the work.

The right of control and personal service are two of the three key tests of employment status and would be enough to repel IR35. However, your company also purchases expensive equipment that is necessary to undertake the work which is also a strong pointer towards self-employment.

Don’t get hung up on charging an hourly rate as basis of payment is a neutral factor. In fact, in the First-tier Tax Tribunal case of Primary Path Ltd v HMRC [2011], HMRC argued that an hourly rate of pay was an indication of employment as an independent contractor customarily charges a specified fee for a particular task.

The Tribunal disagreed, as for a highly skilled specialist such as Mr Winfield (the contractor) they would have expected an employment contract to remunerate him on a specified salary pro-rated for each month. Within the context of professional skills, hourly rates of pay are a feature of the present business world and, in this case, the basis of payment pointed away from a contract of employment.

Does any of the IR35 legislation catch UK recruitment agencies or payment service companies acting for foreign nationals working abroad outside of the UK?

If foreign nationals are non-UK resident while working abroad then they will be outside the scope of PAYE and, therefore, the legislation will not apply.

How to Ask Andy…

If you have your own question for Andy – be it long or short – ask away using our online form and he’ll do his best to answer you.

If you’re in the midst of preparing for IR35, now is the time to think about insurance that flexes to protect everyone in your contractor supply chain. Take a look at our IR35 Protect cover for insurance that does just that. The Premium package gives you access to the Kingsbridge Status Tool too, so you never have to do battle with CEST again.