The Importance of the Upper Level Contract

14th March 2019
Written by Nigel Nordone

The importance of the upper level contract on your IR35 status

The opening correspondence of most IR35 enquiries asks for a contractor to provide copies of their contracts. The written terms and conditions are the first port of call for HMRC when opening an investigation, therefore their importance should not be disparaged.

In HMRC’s guidance (ESM0506) they give the following definition of the term ‘contract’:

“A contract is an agreement between two or more parties which is intended to be legally binding. It can be written, oral, implied or a combination of these.”

Therefore, when finalising your agreement with a client all documentation, including any notes of meetings, should be retained.

It is common practice in the event of an HMRC enquiry for them to attempt to prove the written terms a ‘sham’ – which is where the importance of your working practices comes in. Having a written contract and working practices that mirror each other is always beneficial to aid the successful defence of an IR35 investigation, as this will prevent HMRC from arguing the written terms as false.

Your contract and working practices are not the only factors that should mirror one another when considering your IR35 status; but also, the ‘upper level contract’. The upper level contract is effective where there is an agent in the contractual chain, so the 'upper level' agreement refers to the contractual agreement between the agency and end client, and the 'lower level' is the contractual agreement between the agency and the contractor.

The relevance of the upper level contract was highlighted in the case of Usetech Ltd v Young (2004) where it was said that the upper level contract had to be considered when determining IR35 status. The contractor, Mr Hood of Usetech Ltd, argued he had the right to provide a substitute, as stated in his contract. However, HMRC determined that such a clause was “part of a standard contract, which NES used when engaging individuals through one-man companies” (ESM7270) and that “there was no substitution provision in the ABB/NES [upper level] contract.”

This has often been a struggle for contractors, as it can be very difficult to get a copy of the upper level contract, as the contractor is not a party to it. It may also contain sensitive information that the agency/client would like to keep confidential. Despite the difficulty in obtaining a copy, HMRC will still take this into consideration when building a case against a contractor - it would therefore be detrimental to simply do nothing.

Most contractors have their written terms reviewed for IR35 purposes and it is advisable to attempt to gain a copy of the upper level terms for review also. Should your agency reject your request, all is not lost, and you can ask the agency to confirm in writing that there are no IR35-related discrepancies between the upper and lower level agreements. Doing this will also help to show that you have undertaken some due diligence in checking that the contracts do mirror each other.

The upper level contract will usually provide some insight as to the end client’s intention behind the agreement, and if it does mirror the lower level contract, it may provide some comfort that the end client would be supportive of your status as a genuine contractor. For certainty, however, rather than leaving anything to chance, there is no substitute for speaking to your end client directly. It is hugely important to do so in advance of reform of IR35 in the private sector.

Being able to see the upper level terms or asking for confirmation that there are no IR35-related discrepancies between the agreements will go a long way to establish where your status might lie. If any issues with the contracts are highlighted, there may also be some time to fix them, prior to implementation of the legislation. 

Nigel Nordone
Written by
Nigel Nordone
Nigel Nordone is the Head of Tax at Qdos, after working for HMRC for over 20 years as a tax inspector. We’ve decided to forgive him for this little transgression as his knowledge of how HMRC handle enquiries and compliance checks is really beneficial for both Qdos and our clients. Nigel specialises in employment status and has personally represented hundreds of clients who have been subject to a HMRC IR35/employment status enquiry.

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