Contractors' Questions: Can my agent pull the contract?

Contractor's Question: A large recruitment agency says their legal team will not amend my contract, as I was advised by Qdos who found substitution and agency/client control issues. The agency also says that if a contract is not signed they will need to remove me from the project. They did however say that they have thousands of contractors on this same contract and that it has also been 'verified by HMRC.'

What can I do in this situation, given I want to change the contract? Also, does the agency have the right to remove me from a project that the end client wants me to complete, purely on the basis of me not signing the contract? And what should I do if the agency says they won't change the contract?

Expert's Answer: Sadly this is a fairly common situation. The majority of contracts issued by small and medium-sized agencies have developed over the years to include IR35-friendly clauses. However, there are a handful of large agencies that issue their standard terms which contain unhelpful and damaging wording. More often than not, the large agency will flatly refuse to amend the contract, usually issuing a response along the lines of 'thousands of other contractors have accepted the contract without question, so why can't you?'.

Another issue is that the majority of agencies claim that their contracts are IR35-friendly. In your case, they appear the agency appears to have gone one step further, saying the contract has been 'verified by HMRC.' However unless this can be supported by evidence, then such a claim must be treated with caution. This sort of claim is a real problem in itself: unsuspecting contractors on the agency's books will undoubtedly assume that their entire arrangement falls outside of IR35, without stopping to consider their actual working practices. This could prove to be a very costly mistake!

Having said all of this, a poor contract that the agency won't change doesn't necessarily mean the contractor has no hope of being 'outside IR35'. It certainly doesn't make life easy – the contract is the Revenue's first port of call and hypothetical things (like having a genuine right of substitution) are difficult to prove if the contractual wording suggests otherwise. However, the working practices always make up the bulk of HMRC's attack and the contractor's defence. If you've got a brilliant contract but in reality your client treats you like an employee, HMRC will say the contract isn't worth the paper it's written on. Conversely, if your contract is not so good, but you are genuinely working and treated like a contractor, you should be ok.

This is a massive simplification of course and an IR35 enquiry can be arduous. Yet the key to success in an IR35 investigation is having an end client that understands the issues and doesn't 'put their foot in it' when questioned by the Revenue. The fact is; there are many contractors working under poor contracts, when in reality they are working like genuine businesses and, despite the contract, we would still be reasonably confident of successfully defending them in an IR35 case.

However in your circumstances, if you choose not to sign the contract, you probably will be removed from the project, even if the end client wants you there. You should also be aware that, typically, the client will have signed a contract with the agency that prevents the client from engaging you directly, so you should consider your options carefully, or seek professional advice tailored to your full circumstances.

The expert was Seb Maley, freelancer services manager at a href="http://www.qdosconsulting.com/default.asp" target="_blank">Qdos Consulting Limited