When does an Engagement become an Employment for Tax Purposes?

Consulting Business Mirkwood Evans Vincent Blog

We often get questions from clients about how they can protect their consultancy business from being made subject to IR35 Rules in relation to particular engagements.

There are some general factors, which will always help the decision come down against a company being treated as a “personal services company” for tax purposes. These include factors such as:

(a) being able to provide services remotely from your own location rather than at a Client site;
(b) having professional indemnity and public liability insurances;
(c) having multiple business engagements at any one time, rather than a succession of full time or part time, non-overlapping roles with particular clients;
(d) having contracts, which give the company the right to substitute appropriately qualified people.

However, the Revenue always reserves the right to look at particular engagements in isolation in terms of their tax status, and maintains the position that if a company provides the services of a member of staff to a client (either through an agency arrangement or otherwise) and the terms of the relevant engagement are such that without the intermediary, the individual would be an employee of that client, then the IR35 mousetrap bites.

Therefore whilst the Revenue are much less likely to play the IR35 card in relation to a business which operates in all other respects as a regular business with multiple overlapping clients, it remains a risk where the situation is a little more grey. If clients are trying to maintain their independence as a full operating company and avoid the bite of the IR35 mousetrap, they should do their best in relation to every engagement to make sure that they can:

(a) point to a contract between the Company and the Client, which has a mutuality of obligations (rather than just one way obligations, which would be more consistent with an employer paying salary and benefits, but the individual having all other obligations);
(b) show that if a particular individual was unavailable, another individual with the same or better qualifications would be able to continue providing the services to the Client and the Client would only have the right to reject this substitution if in fact the person was not similarly qualified; and
(c) show that the Company has control over how the services are performed, and not that they are simply reporting into a named individual in the Client organization.

If you would like further advice on this topic or help drafting some terms and conditions for your business, please contact katherine@mirkwoodevansvincent.com

As an opinion only, we suspect that this issue will become increasingly less problematic following the Government’s intention to weaken quite dramatically the tax advantages of running a business as a limited liability company rather than as a sole trader with effect from April 2016, and await developments in this field with interest.