Contractor Definition – Are You a Real Contractor or a Disguised Employee?

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Contractor Definition
Contractor Definition

Contractor Definition

In order to work out if you are a proper contractor we have to look at the Government and HMRC’s contractor definition.

This definitions is not too far from contractor group IPSE‘s contractor definition too.

It’s more the mechanics of it that they and Theresa’s Government argue over.

There are three main IR35 Factors and none more minor ones.

Government’s Contractor Definition

You are a proper contractor, under the Government’s contractor definition if you:-

  1. Don’t control the work you do, where you do it, when you do it and how you do it. In practice a real contractor would tell the company what it is they are going to do. They would create the spec for it, tell the company how long it is going to take, what equipment they are going to use and where they are going to do it. In practice they would agree this with the client and they would both sign off on it.
  2. Right of Substitution – If for some reason you cannot work for your client for a day or number of days, you can send someone else in with the same skills to do the job for you. It would be in your contract with the client that you could do this.
  3. Mutuality of Obligation – There is no obligation for the client to pay you for a set length of time. There is also no obligation for you to turn up automatically to do the work. You are hired to do a set piece of work rather than for a set period of time.

Disguised Employees – Not Proper Contractors

You are not a proper contractor according to the Government, HMRC and IPSE if you:-

  1. Are told by the client what to do. That is, you receive a specification, and they tell you how long it will take, what equipment to use and where you should do it. If the project manager comes round every week to map your progress against his, or her, schedule, that is bad too. It means that the Government, HMRC and IPSE are less likely to see you as a proper contractor.
  2. You do not have a substitute, i.e. someone who can come in and do your work when you can’t, for some reason.
  3. There is an obligation for you to continue working for a set period and for the client to pay you for that set period. So, if you have a three month or six month contract with them, that means you are not a proper contractor.

No, this is not a joke. This is how the Government, HMRC and IPSE define contractors and those who are just disguised employees.

Control and Substitution Rules are Crazy

Read why we think that Supervision, Direction and Control is crazy as a Major IR35 Factor.

Read why we think the Right of Substitution is Crazy as a Major IR35 Factor.

You’ll be astonished at the stupidity of it all.

Mutuality of Obligation Crazy Too

Mutuality of Obligation is crazy too. What difference does it make if you are hired till a project is finished or for three months renewable.

The latter makes more sense for companies as it means that they can get rid of contractors more easily if they are not performing.

Surely that creates a greater risk to a contractor.

Remember that staff members are not hired for three months and six months periods. So why would it make contractors disguised employees because this is the basis that clients hire them?

The whole thing is absolutely crazy. This craziness has been going on for 18 years now without any sensible person calling a halt to it.

IPSE’s Contractor Definition

IPSE have always had this vision of a contractor which is almost completely divorced from reality. It is very different from how most of their membership operate.

Most IT Contractors operate in the following way.

Typical IT Contractors Way of Operating

Companies hire them for an initial three months, renewable, to work on a project for a new IT system.

They get a series of specifications from the Project Manager which states what the contractor should do. They tell the contractor how long the piece of work will take and the Project Manager will come round once a week to track progress against schedule.

This is the normal IT Contractor. This is how I operated in the first half of my contracting career.

To me this is a proper contractor. This is what most companies see as contractors.

They are not disguised employees. They are different beast all together.

Companies see them as contractors – yet the Government, HMRC and IPSE don’t see them as contractors.

How Most Companies Use Contractors

The way most companies operate is that they start a new project perhaps to replace an old system that is creaking.

They may need 25 people to work on this project to do it in the timescale that they want.

They have 5 permanent staff who look after the old system. The new system will require 10 people to maintain it.

They have 5 already so they plan to hire another five who will work on the project.

Those who maintain the old project will continue to do so and then migrate over to the new project when it is complete.

So, the company needs 20 more people to get this project complete.

Do they hire 20 more permanent staff?

That would be crazy.

Company Hires Contractors Temporarily

So, they hire 20 contractors who they can get rid of easily when the project goes live without paying massive redundancy money out.

They hire those contractors for three months initially.

At the end of three months they keep most of them but get rid of one or two non-performers and get contractor replacements.

They, of course, normally keep all of the permanent staff.

This is the normal way that companies want to use IT contractors.

This is the normal way that contractors operate.

Model of IT Contracting Operating for Decades

This is the model of contracting that has been operating for decades and one which companies and contractors are most comfortable with and how they want to operate.

Except that now the Government, HMRC and contractors group IPSE, say that these are not proper contractors.

They all say that these are now disguised employees.

How ridiculous!

Matthew Taylor Report

The Matthew Taylor Report for the Government, recommends that there is a stricter definition of self-employment.

It says that if a contractor does a job that was done previously by an employee then that contractor is a disguised employee.

What nonsense!

Why can’t the Government leave well alone a model that is working, that companies want and that contractors want to do?

IPSE Demands on Government Over Self Employment

IPSE are demanding that the Government, via the Matthew Taylor report’s definition of self employment should be around the following:-

  • Having autonomy in their work. For freelancers this means the ability to send substitutes and for there to be no requirement to do work outside what is agreed
  • Having control over working arrangements. Self-employed people are able to decide how to complete their tasks and the hours and location they choose to work in
  • Taking on business risk. Self-employed take responsibility for their finance and tax responsibilities and can be paid on a per task basis
  • Level of independence from clients. This would include things such as having to wear a uniform or using your own tools and equipment to complete your work.

This would exclude the contractors described above.

IPSE Doesn’t Believe Most Contractors are Contractors

This means that IPSE doesn’t consider those contractors to be contractors at all.

So, why do they take their membership money to the freelance body when this contractor definition they have shows that they don’t even consider the bulk of them freelancers at all?

Why do they only seem to represent a minority of their membership?

The Great Contractor Charade

To get around all of this, and so that they can remain contractors using their personal service companies, they invent a charade.

Contractors change their contracts to say that they control what they do, when they do it, where they do it and what equipment they use in agreement with the client.

They name a substitute in their contract – but it says that the client has to agree any substiute.

Their contract doesn’t state three months or six months but an indefinite period – but with the client able to terminate them at any time with immediate effect.

So, the rigmarole and charade begins.

Project Manager and IT Contractor

The Project Manager doesn’t give the contractor a task to do but they agree what the contractor needs to do between them.

The contractor tells the Project Manager how long the task will take. The Project Manager disagrees. They negotiate and agree a final figure – which just happens to be the figure that the Project Manager had in mind.

They negotiate where the work will take place and what equipment the contractor will use.

The work, they both agree, will be best done at the client’s site using the client’s equipment.

Contractor Client Agreement Documented and Signed Off

They document all of this and both parties, the customer and supplier, sign off on it.

Of course, this is a complete charade and a total waste of both their times.

So, will the contractor ever use the substitute?

Of course not.

The client has to agree at the time when the contractor can’t come in – and the client would never agree it.

HMRC and the Right of Substitution

A court case left HMRC frothing at the mouth.

The judgment said that they couldn’t say that the contractor would never use a substitute  until the opportunity came up to use a substitute, the client wants one and the contractor couldn’t provide one.

So, the court said, they would have to assume that the substitution clause would kick in – unless it didn’t kick in.

That’s HMRC’s nose out of joint over that one as that is hardly likely to happen.

Mutuality of Obligation

Then, the contractor has an indefinite period in their contract with the client. The client still reviews it after three months as usual.

So, a lot of time and effort happens to force fit contractors into the Government’s and HMRC’s idea of what a contractor is.

Contractors keep changing their contractors and the nominal way they operate to stay outside IR35 – by the letter of the law.

And the Government keep changing the rules to try to catch them.

This is a merry dance that just costs time and money.

No Protection for Ordinary Contractors

One of the main reasons why the Government is able to keep attacking the majority of contractors, and their income, is that contractors representatives don’t believe that these contractors are really contractors at all.

So, the merry dance continues.

We are seeing the public sector being devastated by it.

We also await the Matthew Taylor report in June knowing that it is only being done to make contractors pay more tax – by hook or by crook.

Private Sector Contractors and Public Sector Contractors

The report is looking at the private sector as well as the public sector and the way contractors operate.

So, who is going to protect the interests of the common or garden contractor who suffer under this contractor definition?

No one, it appears.

With this contractor definition, the Government will continue to loot their pockets with impunity.

And companies and contractors will continue to combine against the Government, HMRC and IPSE to keep this flexible workforce alive.

It’s not easy!

End

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Public Sector Umbrella Company

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2 COMMENTS

  1. I believe IPSE are finished. I currently pay my IPSE subs yearly partly to provide defence against an HMRC investigation or other losses. I get my contracts negotiated and working practices reviewed so should never need them, but I have the kind of luck that deems I will be that one in a million.

    However, in a year or two’s time, when this government decides all contractors are inside IR35 by default, and contractor clients are so risk averse they will only employ contractors as temps on zero hour contracts similar to a warehouse stock picker at an internet retail company, what use will we have for them then?

    I will pay my subs for another 3 or 4 years to provide historical defence and then that’s it. No more IPSE membership. What’s the point? Should I carry on paying £300 / year just so I can get 4% off at Sainsburys? Or a slightly discounted Dell laptop? (and not one of the desirable ones, either)

    Nope – IPSE has a few years of life left to it, then I suspect membership will fall off a cliff. There will be no more point in being a member. And it’s IPSE’s own fault for being so ineffective, naive (to government “promises”) and having a romantic idea of contractors.

  2. You know what staggers me about this? It was 1999 when IR35 was first mooted and we’ve got absolutely nowhere in the intervening years. Like this article, in even attempting to explain what a Contractor is – or is not – it still falls down.

    For example, I’m an IT Trainer with a contract with a major company with a training requirement. That training requirement could conceivably never end in my working lifetime (I can’t explain more without naming the company). Said company doesn’t provide me with five day week training roles – four may be lucky but sometimes it’s two or three. I’m not their employee; I can turn a training session down (and often do as I don’t want to stay away overnight).

    They don’t promise to provide me with work. I had three days the whole of last December and I’m not working next week, for example. I can’t provide a substitute without someone knowing what it is I train and the client doesn’t want that anyway. In this instance, there is no permanent staff that I work alongside that pay less tax as the client doesn’t have any permie staff. The small team are all Contractors (for obvious reasons, as they can’t guarantee work). I work unsupervised on a site the client asks me to go too – I can’t get the people I’m training to come to my house! – but other than that I have to work at times that the people I’m training are available.

    However, I can ask for areas that I want to work in and refuse others. Am I a permanent employee? How does a permanent employee say I’m not going there and, on doing that, the employer says ‘OK then we’ve nothing for you this week’. Seriously, given these options how many permanent staff would want what I do anyway? I like it, because I’ve been doing it for 30 odd years now and no other way of working but when I broke my ankle some years back I didn’t get paid for 3 months. This new system makes that tax fair how exactly? You’re just squaring a circle. If I’m an employee then where is my holiday and sick pay? How can we be equal? The arguments for this are staggering.

    I simply don’t know any other areas where there is so much misinformation. Back in Y2K I wrote an article that appeared in the then ‘Freelance Informer’. I went through IR35 step-by-step, MOO, Direction & Control etc. etc. and on every single one I could neither apply or un-apply myself to any one of the supposed tenants for employment / freelancing. I read that article again yesterday and 17 years later, the situation is EXACTLY THE SAME.

    However, this article is right in one sense. Who the hell is fighting for us?

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