How to build an impenetrable IR35 defence

Read on below for a guest post from Mindful Contract Solutions

A great contract is an invaluable asset for an IR35 defence, helping to effectively show that an engagement points to being outside IR35. Should an IR35 tribunal occur, having a great contract will put a contractor in a strong position to protect an outside IR35 determination. An IR35 tribunal decision is oftentimes weighted heavily on a contractor’s working practices, wherein lies the biggest reason why such cases can take years to resolve.

In this post, we will cover a few key working practices that, when coupled with a safe and strong contract, will bolster your IR35 defence significantly.

Right to Substitution in practice

Whilst most clients do not hesitate to offer contractors a right to substitute, the arrangement can often be more of a written gesture without any intention of acting on the clause. A contractor’s right to substitution should be clearly stated in their contract, and the fee-payer or end client should be aware of this and happy for the contractor to use it in practice, which having included in your contract can definitely help in the event of a tribunal.

Honouring a contractor’s right to substitution may stand up as good evidence alone for ‘Small Consultancy’ Limited, but it may not cut the mustard for ‘Large Corp’ Limited. Courts would expect an end client to have a proper process in place, so they know what to do in the event of a substitution.

Statement of Work – do you really mean it?

One of the most popular IR35 defence tactics employed by end clients and intermediaries is the Statement of Work, or SoW. This is a written specification of activities (also called scope of services) that the contractor is required to perform in order to deliver a piece of work.

Theoretically, at least, if there is a SoW at the point of agreeing a contract, the “scope of services” guides their work – i.e. the client isn’t the one directly supervising, controlling or directing the work, and therefore the contractor is managing themselves within the parameters of the agreed spec.

When a SoW is used in large commercial contracts with IT systems integrators (SI), the client should consider that the risk of non-delivery within the funding envelope sits with the SI. It’s very unlikely that clients doing SoWs with one-man-band contractors would hold them to a similar account.

For one, contractors (as opposed to freelancers) tend to have only one active income stream at any point in time. They can of course take some risk on some part of it but it would be commercially unfeasible for them to take a risk of non-delivery on all of it.

In the end, it’s all about control

Client control is one of the most important IR35 tests. The perennial problem has been that clients take too much control over how, where, and when the work is done, and ultimately treat the contractor like one of their employees. To be on the right side of IR35, contractors should be managing their own day – as long as they’re meeting project objectives on time, it’s entirely up to them how they do so.

Here’s where a credible intermediary can come into play. An intermediary that focuses on specific types of work, and has some capacity to understand the technology in play, can stand in as a Managed Service Provider. They can give clients the confidence to let go of control, and in turn will act responsibly on behalf of the clients in dealings with contractors, be it on matters concerning recruitment, or dealing with performance concerns.

A commercially-savvy intermediary will also shift you from day rate-based contractor arrangements to true risk-adjusted fixed price options. They will also help deploy fit-for-purpose working practices to support substitution, meaning, if necessary, you can stand and talk at length in that witness box of the things you did to make substitutions happen.

Where do you go from here?

Hopefully you already have a strong contract ready to go, and paired with sound working practices that follow the rules set out in your contract, you should be prepared in the event of an IR35 tribunal.

If your contract and working practices don’t quite match up, one option you could consider is a credible intermediary, acting as a one-stop-shop, they will employ a range of all such measures, and more, to make sure you get to the right side of IR35 and stay there.

This post was written by Amit Kapoor, Director of Mindful Contract Solutions. Acting as an MSP on digital transformation programmes, Mindful have delivered over £13m worth of outside-IR35 services in the new off-payroll regime to the public sector.