Why you should have separate contracts for each project to support IR35
In the world of contracting it is vital for the contract to accurately reflect the working practices of the assignment. Here we look at the value of establishing separate contracts for each project or assignment.
In the event of an HMRC enquiry into any your off-payroll workers’ IR35 status, their first step will be to review the contracts you have in place for the work undertaken.
Each contract should set out the relationship between the contractor and the agency/end-hirer and should include certain elements and clauses which accurately reflect the contractor’s IR35 employment status (see article “IR35 compliant contracts” for more detail on contract clauses).
If the contract contains the necessary clauses and these are reflected in the contractor’s working practices, it is highly likely to be found that the assignment will not be caught by the IR35 legislation.
Multiple projects and IR35 status
Where a contractor is engaged on several different projects, it is essential that the paperwork details all the projects they are working on for the entire period of their engagement with an end-hirer.
The Contract should specify the start and end date for each project, or body of work, together with the fees to be charged for each. This will help to demonstrate that there is no mutuality of obligations between the parties (i.e., there is no obligation on you to provide the contractor with further work, or any obligation on the contractor to undertake any work outside the scope of the current contract).
When you should put a contract in place
It is essential that you consider the terms of the contract before the start of a project or assignment and ensure it accurately mirrors the contractor’s working practices throughout their engagement with you. If any aspect of the assignment or project changes, so should your contract. This will ensure that your contract always reflects what happens in practice.
Agreeing a contract for all projects/bodies of work at the outset of the engagement will help combat any argument that a mutuality of obligations exists.
Undertaking additional work OUTSIDE THE SCOPE OF THE ORIGINAL ENGAGEMENT
If you require the contractor to carry out any additional work that is not within the remit of the original contract, it could affect their IR35 status because:
- Your contract no longer reflects the working practices;
- There is a suggestion that there exists a mutuality of obligations; and
- The contractor is not in complete control over the work they undertake. It appears that you have assumed control over the contractor on the belief that because you are paying for their time you can ask them to do whatever you like.
If you ask a contractor to undertake work outside the originally agreed piece of work, they should not be obliged to accept this and should be able to actively negotiate the additional work before they agree to undertake it. Once both parties have agreed on the specifics of the additional work, such as the start and end date, scope of work, and the fee, you should immediately issue a revised Assignment Schedule/Contract Confirmation Note/Purchase Order for each new project/piece of work.
Dragonfly vS HMRC (2008)
The leading case of Dragonfly v HMRC involved a contractor disputing HMRC’s determination that his engagement with The AA fell inside IR35, and therefore he should not have to pay a tax bill of £99,000.
This case highlighted the importance of undertaking a clearly defined project, which is specified in a contract. In this case, the contractor had moved from one project to another at the request of the end-hirer. This led HMRC, and ultimately the court, to conclude that the contractor had become part and parcel of the end-hirer’s organisation, amongst other things, and therefore should be taxed on a PAYE basis.
Ensure you are clear as to the work the contractor will be undertaking
The Contract is usually made up of two documents:
- Firstly, an “Assignment Schedule”, which is sometimes called a “Letter of Appointment”, “Contract Confirmation Note” or “Purchase Order”. This document sets out the assignment specifics such as the invoice rate, services, project name(s), start date and end date of the project; and
- Secondly, the terms and conditions. This document is the “small print” and details the parties’ obligations and liabilities whilst working on the assignment; along with the notice required to terminate the engagement; how the assignment is to be performed and; the necessary IR35 elements and clauses as discussed above and in the “Contract Clauses” article.
If the contractor is working on more than one project or the project changes over time, you may just need to make changes to the Assignment Schedule to ensure they reflect the changes in the working practices. You usually don’t have to change the Terms and Conditions.
If your working practices significantly change during the engagement, the contract should reflect this. It is also strongly advised that regular working practices reviews are undertaken by the contractor completing and submitting an Employment Status Assessment (ESA).