Client/Agency contract. Is it important?

UKTECH has received a report from an agent who is losing contractors to other agents working on the same client's site.

The client has refused to change from the existing standard agency contract and the agent concerned will not sign a contract with the contractor that does not reflect the reality of the situation. Other agents, against the advice of their own representative bodies, are prepared to offer contracts that do not reflect the reality of the working relationship in the hope that they can 'poach' disaffected contractors.

The contractors have been advised by their accountants to ignore the agency/client contract and all they need to do is sign an 'IR35 proof contract' between their company and the agent. The accountant has such a contract, which they will provide for XX pounds.

It has been widely publicised that any tax liability (and liability for penalties) will fall upon the contractor. In this scenario, unscrupulous agencies may believe that they have nothing to lose by signing a contract which they know does not reflect the reality.

UKTECH has already published some advice on this, but we have carried out some more investigations.

We have received a copy of a letter from the Inland Revenue, which makes clear their intentions and serves warning on contractors who believe they are moving outside IR35 by following such advice.

If a service company supplies a worker's services to a client through an agency there are likely to be contracts between the worker and the service company, the service company and the agency and the agency and the client. When considering whether or not an engagement falls within the terms of IR35, the Inland Revenue may need to see copies of all these contracts before the relevant status can be identified. The worker may also be asked to provide additional evidence about the working relationship and the Inland Revenue may need to interview the other parties to the contract(s) to ensure that those contracts properly reflect the actual terms and conditions of the particular engagement

We asked Francesca Lagerberg, Senior Technical Manager at the ICAEW Tax Faculty for her opinion on this. The ICAEW Tax Faculty is the UK's leading authority on tax matters and very much in the news at the moment with the 30 out of 100 score on the IR35 proposals.

Francesca Lagerberg said: "A contract that does not reflect the reality of the engagement is a contract not worth the paper it is written on. IR35 pierces the corporate veil of a personal service company and allows the Revenue to look at the nature of the commercial relationship between the worker in the personal service company and the end client. As such the Revenue will consider the whole picture, which includes the real intention behind any relevant contract. Many factors are important in determining who is and who is not within IR35 but so-called 'IR35 proof' contracts should be used with great caution if they do not bear out the reality of the situation. Advice to the contrary is misleading and potentially very expensive for the personal service company or similar intermediary who relies on such a contract and subsequently fails to make any required payments of tax and NIC under the new rules."

This is one more example of the confusion created by IR35. The contractor relies on information provided by the agent when deciding whether to take a contract. They have no means of checking these facts before starting the work. A right of substitution (which is one of the factors that is relevant in determining if someone is in or outside of the IR35 rules) may be in the agency/contractor contract, but not exist in the client/agency contract for example. It will be highly unlikely this will be discovered by the contractor until they come to introduce a substitute or at the point of a Revenue inspection.

Under the existing regulation there appears to be a positive incentive for rogue agents. The tax adviser sells more contracts. The agent steals more business. The client turns a blind eye and does not have to invest time and effort in examining the contractual description of the relationship. The only party left 'holding the baby' will be the contractor.