Contract of service or contract for services?

Posted: 18th June 2018

EmploymentThe distinction between contracts of service and contracts for services may appear a fine one, but it can have crucial tax implications. The point was made by one case in which a company through which an IT expert provided his services succeeded in overturning substantial Income Tax (IT) and National Insurance (NI) demands.

The company provided the expert’s personal services to an agency, which in turn deployed him to perform work for a government department. HM Revenue and Customs (HMRC) took the view that intermediaries legislation – commonly known as IR35 – applied to the arrangement. That legislation was introduced to combat the practice of individuals using corporate structures to reduce or defer IT and NI liabilities.

On that basis, HMRC declined to treat the fees paid to the company in respect of the expert’s services as corporate revenue, on which Corporation Tax would be payable. Instead, it treated them as deemed salary paid to the expert, on which the company was liable to pay IT and NI contributions via the PAYE system.

In applying IR35, HMRC took the view that, had there been a direct contract between the expert and the department, it would have been a contract of service, rather than a contract for services. Demands were therefore raised against the company totalling more than £26,000.

In upholding the company’s challenge to that decision, the First-tier Tribunal (FTT) noted that the expert had worked on a number of brief, fixed-term contracts and was paid a daily rate. His engagement did not extend beyond the completion of the specific project in respect of which his skills were required and, when one contract ended, the department was under no obligation to offer him another.

The company’s contract with the agency also contained an unrestricted substitution clause, whereby it could nominate another suitably qualified individual to perform the work assigned to the expert. The expert was also required to personally remedy any defects in his work and the overall picture was of a man carrying on business on his own account. In the circumstances, he was engaged on a contract for services and HMRC had no entitlement to raise the relevant demands.