It's a well-known fact in the UK tax system that a well worded contract can assist enormously when a person is challenged under the self-employment and IR35 rules. A recent tax case has now shifted the emphasis in favour of HMRC in such instances, but is the Smart Frog actually surprised? Nope.
Briefly, where a contract contains a "substitution clause" then HMRC have often shy'd away from challenging it because of an Employment Tribunal case some years ago which ruled that such instances could not create an employment situation, and so self-employed and personal service company clients have always been advised to include a substitution clause within their contracts.
HMRC have always stated, however, that a contract must actually reflect what happens in reality. So, where a contract includes a substitution clause then a substitute must actually be used. This point had not, however, been tested in the courts. Until now.
The recent ruling threw out the substitution clause because it didn't apply in practice. This means that HMRC's long-held view is now enshrined in tax law, and so the Smart Frog expects an influx of IR35 and self-employment status reviews to come flooding in.
Is anyone actually surprised? Surely not. HMRC have always stated their view clearly, it's just that they hadn't had the balls to test it in the courts. But now they have, and they have won.
But surely it leaves us in exactly the same position as we were before, and that is for clients to ensure that all aspects of their contracts actually apply in practice, and are not just inserted for tax "convenience". That's what the Smart Frog has always advised his clients. Perhaps other accountants have not adopted the same stance, and perhaps they're the ones who are now up in arms. Cynical Smart Frog? Maybe.
The Smart Frog's life mission is to ensure that clients do not pay more tax than is necessary, but at the same time they must stay within the letter of the law. If clients sail close to the wind, then that's fine, but they must expect to be challenged by HMRC one day and, when they are, they must expect to lose once in a while. That's life.
Rant over.
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