Is a lengthy contract detrimental to IR35 status?
Securing a long term contract will create a good degree of financial security for a freelancer's business and therefore some peace of mind but does it have a negative effect when it comes to IR35? In short the answer is no.
The length of an engagement is a neutral factor when considering employment status but other factors may come into play that could have an effect on a contractor's IR35 position.
HMRC are of the opinion that the longer the engagement then the more likely the existence of a contract of service (employment) because the end client will want to exert significant amounts of control over the freelancer. This was exemplified in the first tier tax tribunal case of JLJ Services Ltd (2011).
John Spencer, the director of JLJ Services Ltd, was an expert in his field, and provided his services to Allianz during the period May 2000 – 2007. There was little intervention with the day-to-day work that John Spencer did although Allianz would naturally enquire about progress, particularly if a project was overrunning.
If some emergency arose, Allianz testified that they could require the contractor to pause work on a particular project if some other matter needed to be attended to first.
Although Mr Spencer did not believe there was any quality control at Allianz or at least the type he had been used to in his career, the Tribunal believed there would have been sufficient quality control for the management to derive confidence that Mr Spencer was capable to accomplish the project work.
The Tribunal accepted that in the early period of the contract when Mr Spencer was engaged for a single project and for defined projects thereafter, the contractor was using his expertise in a manner that could not be controlled in the sense of “how” he did his work. Control over his work was therefore limited. By the end of 2003 however, Allianz wanted Mr Spencer's services on a permanent basis. They no longer engaged him on projects but rather on an annual basis and as such he became one of Allianz's key computer experts, available for work that was likely to be available indefinitely. As such, the control argument became stronger.
Where an engagement lasts a number of months the engager may want a right of control because of a need to move the worker between tasks, so say HMRC.
Long engagements are most certainly likely to involve mutual obligations as both parties may expect the offer and acceptance of work bargain to be ongoing.
As time marches on the contractor may be viewed by the end client as part of the furniture and become integrated into the organisation. It could also be that in a more relaxed environment the approach to the work may also be less business-like.
Where a contract is for a short period there may be less scope for the end client to exercise control over the freelancer especially if the freelancer has been taken on for a specific task. Shorter spells may not provide enough time for an individual to be integrated into the end client organisation. With anyone starting a new job more often it always takes a good while for them to get fully settled in and become familiar with their new surroundings and colleagues.
If the contractor knows they are only going to be working at an end client site for a brief period of time then their relationship may be more formal and a more business-like approach maintained at all times. That is not to say that freelancers do not effuse this in longer engagements but the theory is that during such lengthier spells familiarity may cause the business mask to drop.
Mutual obligations may still exist although it could be that termination notice periods will be shorter which will help to argue otherwise.
This test is a minor one and not one that is decisive. A contractor therefore should never allow themselves to be dissuaded from accepting a lucrative long engagement or even terminating one simply because of the IR35 effect. What they should be mindful of during such times, however, are the other status factors that are evoked by a long contract period.
Written by Andy Vessey