The two-tier contract & IR35 compliance

Most contractors take the appropriate steps in checking the compliance of their written contracts but when the assignment involves an agency, the contract which the contractor ensures is compliant is only half of the entire agreement.

You will have a contract which is between your limited company and the recruitment agency. The recruitment agency will then have a contract between themselves and the end client. This ‘upper’ or ‘second-tier’ contract between the agency and end user actually plays a part in your IR35 status, but here’s the catch; you have no right to ever see that contract.

There have been real cases where the upper tier contract has played a large role in a limited company’s case, such as Primary Path Ltd, Usetech and Dragonfly, proving the importance to ensure that the upper and lower tier contracts correlate with one another. Should they fail to do so, you could be deemed inside IR35 and you will be solely responsible for paying any backdated tax and NI liabilities plus interest and potential penalties. Even if you have done your utmost to ensure the lower tier contract and your working practices are compliant, the upper tier contract could throw your case out of the window. This seems mightily unfair given that you may not ever see this contract which may include terms you have personally not agreed to.

Unfortunately, there is very little that you can do. Without being able to demand access to the upper tier contract, you cannot check its correlation with your lower tier contract. You can politely ask your agency whether you can view the upper tier contract but it is unlikely that this request will be accepted. The agency may provide differing contracts as you will want an IR35 compliant contract but the end user may be happier with terms which coincide more with an employment contract as this may be what they are used to (for example, they may not be comfortable with a written agreement that they do not have control over how you complete the assignment). What you can do is try to reduce the chance of HMRC prying so deeply by ensuring the lower tier contract and your working practices are compliant with the IR35 legislation, as well as paying yourself a market rate salary. The more plain-sight-compliant you are, the less likely HMRC will delve as far as the upper tier contract.

Qdos are currently on a mission to try and improve this situation for contractors by working closely with recruitment agencies. Qdos are offering IR35 services to recruitment agencies including IR35 contract assessments of their standard contracts with contractors and encouraging IR35 assessment of the upper tier contracts as well. We hope that every part of the contracting community can work together to make IR35 that little less painful.