It caused HMRC to change their method of numbering press releases, it is alleged to be directed at one particular industry, it seeks to subvert the true legal nature of commercial contracts and as a result it is extremely unpopular. Yet still the government persists in trying to make it work, and still makes itself yet more unpopular by trying to do so. Yes, it’s IR35!

Introduced in response to wholesale use of personal companies in the computer technology sector, IR35 allows HMRC to ‘look through’ such companies for tax purposes where the true nature of the working relationship is an underlying employment of the computer consultant. In theory the application of IR35 is much wider than that, but in practice this is the area HMRC have concentrated on.

The reason for its existence is that employment law can make it relatively easy in the right circumstances to create a self-employed relationship, and thus avoid the application of national insurance, whilst the contractor draws his funds from his company in dividend form. And arguably, if you know what you are doing, IR35 should not be able to catch your arrangements.

The key to this issue, and indeed the whole issue of employment v self-employment, is the requirement for the services of an individual. This is the first and key question I always ask when employment status is discussed: “Do you require the services of this particular individual to perform this particular task?”

If you do, the working relationship is an employment, and to my mind there is nothing you can effectively do to change that. On the other hand, if you do not, it is a relatively simple matter to ensure that there is no employment, and indeed no question of IR35 applying. Because employment is fundamentally a matter of personal service, and if the engager (to use a neutral term) is not bothered about a specific person providing the service, there need be no employment.

Thus an appropriate substitution clause, in the right circumstances, is an effective guard against unexpected employment status. The contractor should be responsible for finding and paying the substitute, and there is not even necessarily a problem in defining who is acceptable to the engager as a substitute (or more accurately, what the attributes of such a substitute would be).

Where this gets interesting for IR35 purposes is where a company contracts with an engager to provide services. Clearly it would be counter productive in the extreme to stipulate that a named individual will provide those services (a clear cut case for application of IR35, I suggest) and thus invariably such contracts do not provide for the services of such a named individual. Which begs the question, if a particular individual always provides the services under such a contract, does that mean that IR35 should apply?

Now ideally it would be good for more than one person to provide the services, but things are not always ideal. I certainly always say to my clients that making (at least occasional) use of a substitution clause or using more than one person to fulfil a company contract is good practice, but it does not always happen. The question then becomes the difficult one of whether it is or becomes implicit in the contract that personal service will be provided, even though it is not explicit.

In my contracts for services it always says that “for the avoidance of doubt this contract does not require the services of any particular individual”, which I think is pretty clear cut on this point, and certainly not specifying this leaves you at risk of an IR35 challenge in my view. And why take an unnecessary risk, particularly with HMRC prowling around this particular area. Thus always have a written contract for services, and always make clear that personal service is not required, and employment law should ensure that you have no problems with IR35, or with HMRC recategorisation in general.