Extension of IR35 to private sector, Part 6 – getting too personal
From April 2020, IR35 will make end-user businesses liable to deduct income tax and National Insurance on payments to personal service contractor companies where, if you took away the company, the individual whose services are supplied would be their employee. A key factor in that question is the obligation of personal service on the individual – in other words, when you contract with J Soap Limited for the provision of a particular service, are you doing so because Joe Soap himself will be doing the work? Such that if Mr Soap were not willing to do it, you would not enter or continue your contract with J Soap Limited?
If it is clear on the face of the contractor contract that the identity of the actual physical service provider is important to the end-user, that takes you a material step closer to an obligation of personal service on his part. Let us look at some common drafting options:-
- “J Soap Limited will provide to the client the IT verification services of Joe Soap for the term of this consultancy agreement”. Not good, as it is clearly all about Joe Soap doing the work with no ability for the PSC to supply anyone else.
- “J Soap Limited will provide to the client the IT verification services of Joe Soap and may only provide any other person to provide those services with the prior written consent of the client at its entire discretion”. This is a bit better because it countenances at least the theoretical possibility that someone other than Joe Soap might do the job. However, it is still not great from an anti-IR35 perspective because it still starts with Mr Soap and the client is the one with control over whether it ever sees anyone else in his stead.
- “J Soap Limited will provide to the client the IT verification services of Joe Soap or at its discretion of any other person contracted to it who is suitably trained, qualified and experienced to provide those services to the same standard”. Now this is progress – although Joe Soap is still mentioned by name, so his identity is clearly important to some extent, the right to swap him out for someone else now lies with the PSC, not the client. As a result, it gets harder to say that he is personally obliged to do the work, especially as he controls the PSC and it is therefore effectively his own decision to do the work or send someone else.
- “J Soap Limited will provide to the client IT verification services through the medium of one or more persons engaged or employed by it who are suitably trained, qualified and experienced to provide those services to the standards required under this agreement”. This is much better – Joe Soap as an individual no longer features at all and the focus has instead become the services themselves and not who will be providing them. J Soap Limited will not be in breach of contract if it supplies someone else and there is no sign of any even implicit preference on the client’s part that it should be him. Generating an obligation of personal service out of this wording would be almost impossible.
So to the greatest extent practicable, end-user businesses should try to draft contractor agreements to focus on the nature, specification, deadlines, quality milestones, etc. of the services to be provided, and not upon who is to be physically sat there doing the work. After all, if the work gets done to the right standards, you do not care whether Joe Soap did it or not. If it does not, then you can just terminate the contract anyway.
Ideally, do not mention the individual consultant by name at all. That means when setting up or negotiating the contract, write as if to the PSC and not to the individual behind it, however well you know or rate him. Not “Dear Joe, you have agreed to provide…….;” in other words, but “Dear Joe, your company has agreed to provide….;” or better still, “Dear Sir or Madam, your company has agreed……”
This can all sound like the most ridiculous semantics, but it is on such small cosmetic factors that these cases can turn. Attention to the formalities will be key.