Confusion results in odd contractual clauses
IR35 has always been ambiguous, which has always been the main bone of contention in that it can be extremely difficult to determine IR35 status without seeking the advice of an independent expert who knows the legislation inside out.
The legislation is not only confusing for contractors themselves, but also agencies and end clients alike, who now, particularly thanks to IR35 changes in the public sector, find themselves having to get to grips with IR35/employment status.
It’s no wonder then that we find some odd clauses within the contractual agreements we review, which are borne out of so many changes in legislation concerning employment status over the last few years. One of the most common issues is that IR35 often gets confused with the Agency Legislation, which although is concerned with employment status, does not affect incorporated businesses (confirmed in
HMRC’s ESM2017).
The Agency Legislation was amended in April 2014, and now states that for agencies engaging self-employed individuals - where they fall under the supervision, direction or control (SDC) of the end client - those workers will need to be treated as employees for tax purposes, and placed on the agency’s payroll.
As a result of this, we’re now seeing strange contractual clauses stating that a limited company contractor may not engage any workers on a self-employed basis, but that they should all be paid on a PAYE basis. For personal service companies (PSCs) this will usually be the case, but it could place a restriction on the right to provide a substitute and engaging helpers, if all such workers are required to be employees.
Additionally, stating that all of the limited company’s workers have to be employees, flies in the face of what a genuine business should be able to do which is to control their own operations and arrange their own remuneration structures in the most tax efficient manner.
If you have a contract with an agency, you might have spotted clauses like this in your own agreements and there’s no need to panic. Such clauses are defendable simply because they are borne out of confusion and because the clauses usually only exist to protect the commercial interests of the agency rather than to restrict your right to provide a substitute. Clauses like this should always be flagged up in an IR35 review however and if there is any doubt on the true intention of the clause, it’s always advisable to discuss further with your agency.
