Don’t forget about the upper level contract

Most contractors will have their contract with the agency reviewed for IR35 purposes, but the upper level contract is often forgotten about. This is partly due to an (often correct) assumption that the agency will not allow a contractor to see the upper level contract because of the sensitive information it might contain.

The upper level contract comes into play where there is an agent in the contractual chain, so the 'upper level' refers to the contractual agreement between the agency and end client, and the 'lower level' is the contractual agreement between the agency and your limited company.

The importance and relevance of the upper level contract was highlighted in the case of Usetech Ltd v Young (2004) where it was held that the upper level contract had to be considered when creating the 'hypothetical contract' and therefore determining IR35 status.

The contractor, Mr Hood, had contended that IR35 did not apply because there was a right of substitution clause in his company's contract with the agency, and there was no obligation on the end client to provide work. However, the lower level contract was a standard contract that the agency used and whilst it did contain a substitution clause, there was no sight of such a clause in the upper level contract.

To forget about the upper level contract therefore, can be highly detrimental in the event of an IR35 status challenge. Regardless of whether you might be able to see the upper level contract or not, HMRC will use it in their defence against a contractor. It’s therefore crucial to consider this to avoid some nasty surprises, should the contract be scrutinised by HMRC during an investigation, when at that point it may be too late.

If an agency refuses to allow sight of the upper level agreement, all is not lost and you can instead ask the agency to confirm that there are no IR35-related discrepancies between the upper level contract and lower level agreement. Doing this in writing 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 contain the right clauses and 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.