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IR35 - How does Direct Contracting help?

Going back to basics, the IR35 legislation was introduced over 15 years ago to clamp down on “disguised employment”, specifically where someone was engaged on a contract for services, when really it could be argued that the real relationship between the parties was one of employer and employee. The type of abuse that the legislation was supposed to address was where an employee could resign their employment on a Friday, and return to their job on a Monday, this time engaged on a contract for services.

Such legislation was never going to be very easy to implement, or clear to understand. In the above case, both sides could put forward plausible arguments that the nature of the relationship had indeed changed, and was no longer one of employer & employee. HMRC would have to look at various factors of the relationship to determine if the relationship was a genuine “contract for services” or one of “disguised employment”. These determinations often have to be made case by case.

Much of the contract industry has focussed on the wording and terms of the contract itself, but what types of factors are HMRC using to determine IR35 cases?

Even more important than the wording of the contract, is the actual nature of the relationship between the 2 contracting parties.

One thing to be considered critically is whether or not the person providing services is in “business of their own account”, and it is here that a direct contractor can make a more persuasive case than a contractor who has found work via an agency, and has a contract for services with that agency. In looking for business, a direct contractor may have spent time and effort researching business prospects, approaching potential clients, or indeed investing in a subscription to a contract intelligence service such as Contract Spy.

When they are in a contract, a direct contractor will have a contract directly with the company that has the need for resource, and consequently has the opportunity of deciding their own terms of business, which is a very clear indicator of being in business on their own account. The more business-like that you can produce these terms, and have your client record their agreement to them, the more effective they are likely to be in supporting your case for being outside IR35. Never be tempted to sign up to Terms put in front of you by the client, which could clearly weaken your case in the event of an investigation.

Similarly, having a business website, producing business cards and marketing materials can provide evidence that a contractor is in business of their own account. These things can be easily, and relatively inexpensively, addressed, but are often overlooked by contractors who may be too busy searching for their next contract and delivering client services to see them properly addressed.

Contract Spy is keen to continue working to remove the barriers of entry to Direct Contracting, and is evaluating the provision of a “Direct Contractor Business Pack” comprising fully customisable terms of business, business website with full hosting and own domain name, and a business stationery package. This is intended to provide everything the busy contractor needs to support being in business on their own account.

Please contact us to register your interest and to receive further details of the service when available.

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