Extension of IR35 to the private sector, Part 9 – the importance of significant others (UK)
Come April 2020, if you want to avoid having to deduct tax on invoices from J Soap & Co for the supply of Joe Soap, you will need to confident that it is in business on its own account and not just a vehicle for our Joe to minimise his income tax bill. Key to being in business on one’s own account, successfully at least, is having a range of customers, so your contract needs to avoid terms which force J Soap & Co to cut across that requirement. This may take a variety of forms:
- Time commitment – does Joe Soap really need to be with you full time, or even to have any fixed working hours at all? Do you really care if the consultant is working at night or over weekends or how long he takes to complete your task so long as it is delivered on time? The issue here is that if your contractor is obliged via his PSC to work 9 to 5 for five days a week over an extended period, then whatever the PSC contract may say about Joe Soap being free to work for other clients also, he simply won’t have the time to do it. That express right is then seen at best as illusory and at worst as a deliberate attempt to mislead either the contractor or HMRC as to the true position.
- A part-time or no fixed time commitment therefore carries a lesser risk, especially where the arrangement is going to be long-term. A short-term full-time commitment looks like a pressured but finite project, but an indefinite full-time commitment looks like, well, a job. Consider whether you can minimise the control and exclusivity implicit in a full-time hours commitment by focusing on the task to be completed and the deadline for it, rather than the specific hours to be worked.
- Express exclusivity – this is basically the same as practical exclusivity (as above) but worse. Here you are saying that J Soap & Co can supply its services only for you during the contract, which is likely to be impossible for it to square with its obligations to any other clients it may have. If you are trying to show that you are just one of J Soap & Co’s clients (i.e. that it is genuinely in business on its own account) then obliging it to lose all the other customers which give that argument its legitimacy is hardly a great start. Provided that the PSC achieves its contracted task by its contracted date for its contracted price, you can have no complaint even if it does also find a way to service those other clients too, whether through Joe or someone else.
- What is the actual benefit to you in requiring it expressly not to do so? One answer might be that it reduces the chance of J Soap & Co not devoting to you enough of Joe Soap himself to get the job done in the time required, or of his improperly using your information to assist another client or vice versa. If that is your concern, then it should be dealt with by appropriate terms around confidentiality and the declaration of conflicts, rather than a blanket ban on other work.
- Post termination restrictions – it is possible to make a case that a contractor might make connections with your staff which you would wish to protect for a period after his PSC stops supplying him. It is also just about feasible to argue that the contractor should not be able to leave you and immediately use the knowledge of your clients which he acquired in the course of that supply to solicit them from you. However, neither covenant should last as long as (let alone be drafted in the same terms as) the parallel covenant which you impose on your employees. Remember that the whole essence of the PSC-supplied contractor is that he arrives briefly to do a (hopefully) largely back-room advisory or strategic role and then pushes off again. Therefore he should have much less opportunity than a permanent employee of equivalent seniority to build the relationships with employees and clients which you are trying to protect. A lesser risk should mean shorter covenants.
- And for all the reasons concerning exclusivity above, but in spades, don’t impose a post-termination non-competition covenant on a PSC. Then you are saying that it can’t operate as a business in its own right in its chosen field even after its relationship with you has ended. Again, suitable confidentiality wording should be all that is required to protect your position.