Bite Size IR35: Is the Feeling Mutual?

There is no contractor without contracts so it is no surprise that they tend to put a lot of work into finding and securing them. It is a lucky contractor who manages to nail a contract which they then have the opportunity of continuing.

Unlike their permanently employed counterparts, contractors have an end date to their contracts but clients may have further projects and may have been happy enough with your services to want to use you again or non-project work such as interim management may simply be needed for longer than anticipated. There are any number of reasons for contracts to be continued but continuously renewed contracts with a single client rings alarm bells at HMRC, as they see an employment-like relationship being developed. This is referred to as Mutuality of Obligation.

It is important to note early on that there is nothing wrong with renewing your contract or having a lengthy one. A myth has long circled the contracting community that a contract longer than two years puts you automatically inside the IR35 legislation. This is simply not true, although unnaturally long contracts may be ruthlessly questioned.

An employee will be given work and they are expected to continuously complete it, if they run out they ask for more and their employer is expected to provide it until the employee resigns, retires or is dismissed. A contractor on the other hand, is brought in on a strictly temporary basis for the length of the contract and no more. The primary difference between the two is that the contractor can refuse further work and the end client is not obliged to provide any. If the work is completed early then the contract can end early. It is often argued that although the two parties are not obliged to continue their business relationship, they are not obliged to decline it neither. For this reason, continuously renewed contracts are being seen as less of an indication of disguised employment and further emphasis has been applied to non-mutuality of obligation.

Non-mutuality of obligation is essentially the contractor’s ability to walk away from the contract. Employees can also resign from their employment, so it is important that limited company contractors do not simply have the ability to leave their contract, but are also not obliged to unreasonable procedures or lengthy notice periods in order to do so. A clear start and end date to each contract and contract renewal is essential, as without these definitive timescales of your relationship with your end client, the Revenue will take the view that there is a presumed continuation of the contract.

Remember that the clauses in your contract must also mirror true in real life. If your contract says that you can leave your contract providing you give notice within 14 days but your client has told you that you will need to give notice within 30 days, then the written clause will be nullified in an investigation.

By:Jane Hailstone

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