IR35: Why you should ask to see the upper level contract

23rd April, 2019
IR35: Why you should ask to see the upper level contract

In the event of an IR35 enquiry, HMRC will ask to see copies of the written contract. Although it’s common practice for them to dispute paper contracts as ‘contrivances’, it’s crucial that contractors take steps to ensure that the information presented in their contracts is consistent. Not only should a contract accurately reflect their working practices, there should also be conformity between the lower and upper level contracts.

The upper level contract comes into play where there is an agency in the supply chain. While the lower level contract details the terms and conditions between the agency and the contractor, the upper level contract details the agreement between the agency and the client. Ideally, both the upper and lower level contracts should corroborate or ‘mirror’ each other. This is important when it comes to upholding the validity of working practices, such as right of substitution and control.

For example, if a contractor specifies a right of substitution in their contract with the agency, but this is missing from a standard contract that the agency signs with the client, this will be used by HMRC to discredit the contracts authenticity.  This happened in the case of Usetech Ltd v Young (2004), where it was established that the upper level contract had to be considered when determining IR35 status. It’s therefore essential that the contractor is able to confirm that the upper level contract mirrors their own contract.

This can be difficult for contractors, as the upper level contract may contain sensitive or confidential information that the agency or client may not want the contractor to see. However, with IR35 reforms coming into the private sector in April 2020, it’s increasingly important that contractors take steps to ensure that they are working compliantly. Despite the difficulty involved in seeing the upper level contract, HMRC will take any discrepancies seriously when building a case against a contractor.

When contractors have their contracts reviewed, they should also attempt to obtain a copy of the upper level contract for review. If the agency rejects their request, they can ask the client to confirm in writing that there are no IR35-related discrepancies between the upper and lower level agreements. This will demonstrate that the contractor has taken reasonable care to make sure that the contracts are accurate.

If the upper level contract does corroborate the lower level contract, this is a good sign that the end client would be supportive of the contractor’s employment status. However, when there is doubt, the contractor should speak to the end client directly. The latest off-payroll consultation confirmed that it will be the responsibility of the end client to determine the contractor’s IR35 status and to communicate this to them directly. In theory, this should make it easier for the contractor to obtain this information and ensure that it is reflected in writing.

Taking measures against getting caught by IR35 should be top of every contractor’s list of priorities if they are working in their own limited company. If contractors are investigated, they can face significant penalties. Whenever possible, the contractor should seek to confirm the terms of their arrangement in writing, either through obtaining copies of all contracts, or by asking the client to sign a confirmation of arrangements letter.

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