Is a retainer fee contract likely to cause an IR35 headache?

Freelancer’s Question: I’ve been permanently employed by a company which I have helped grow from day one, building most of their systems and processes. The business is located 150 miles away and before covid, I used to travel and stay overnight. Since covid, I’ve decided I don’t want to be away from my family, and so I‘ve set up a company to do remote consultancy work.

The employer has requested that I do some consultancy for them too, as me leaving will leave them in the lurch. As I am senior enough in the business that I work from home now, do not really have a manager, and decide what I do and when I do it, moving into contracting with them should not be so difficult., We all want the contract to be outside IR35 and generally we do not foresee this being an issue, as new projects will come up separately, and my work will be on a project- by-project basis. However as I am so integral to the business, they need me to support the systems and process and need access to my knowledge if required., A 6-12 month contract, two days a week -- or 15 hours retainer -- to cover the work is in the offing, partly as it will give my new venture a bit of security, but could it potentially give me an IR35 headache later on too?. The contract will be to provide advice, while resolving ad-hoc problems when they arise in the business. I’m unsure how to document such work so that it stays outside of IR35. But I know it will also depend on the working practices and so, I plan to operate a ticketing system where they can log a problem or issue they need my assistance on.

Do you think a contract for ‘general business support’ by retainer is a problem under IR35? What recommendations would an IR35 expert give to ensure the correct, business-to-business treatment?.Expert’s Answer: This is not an unusual situation and commercially it is often very attractive, especially for start-up companies, like yours, looking to have some certainty over their income.

Retainer fee contracts: the pros, and cons

The proposed arrangement is typical of a ‘retainer fee contract,’ whereby the fee is not associated with the success of a particular project, but is a fixed amount of money that your client agrees to pay you in advance -- to secure your services as a consultant often at short notice.

The very nature of a retainer contract means that obligations attach to the retainer fee i.e., the client pays you on an ongoing basis in the expectation that you make yourself available, thereby creating Mutuality of Obligation (MoO).

Risk aversion

End-clients with a more risk-averse nature may feel that the arrangement is highly likely to fall inside IR35, especially where they are retaining an ex-employee (as you are). This can be a tax-neutral situation if the end-client and you agree the retainer at the same level as the salary and pension contributions that you would have taken as part of tax-efficient withdrawal of funds from your company. For those less risk-averse engagers, the question is, does the MoO created provide sufficient indication of an inside IR35 position, or can a working arrangement be arrived at that places the contract outside IR35?

The taxman's take on mutuality...

Be aware, HMRC’s very basic view of Mutuality is that it will always exist where the engager is obliged to make a payment in exchange for the worker being obliged to provide his or her own services. These basic requirements could be present in either a contract of service or a contract for services but, on their own will not determine the nature of the contract. Mutuality must be considered more broadly, alongside other employment status indicators and reassuringly for you perhaps, yes, it is possible to structure an agreement in such a way to fall outside IR35.

As to how you and your client do this, you should ensure your contract does not limit your ability to work for other clients while under this retainer -- and it should allow you to terminate at short notice, as well as define very carefully what is covered by the retainer.

Other outside IR35 characteristics (including substitution)

Any additional projects or tasks should be separately contracted for. As the retainer agreement will be with your limited company and not you personally, the contract should allow for the right of substitution. That means you should be able to send any suitably qualified individual to undertake the work required, in your place, under the retainer agreement without reference to your end-client.

Finally, when considering a retainer contract, you also need to consider what underlies the method of the retainer payment. Does the contract enable your client to exercise control over you? Can they dictate the time and place where the service is to be provided? Do they tell you how to undertake the work?

Lastly, keep an eye out for control

If you at some point answer ‘yes’ to these three questions, they may have Control which can be damaging from an IR35 perspective. However, it would seem in your scenario that, currently, this is not the case given the work will be based on ad-hoc requests via a ticketing system, and with the end-client entirely reliant on the expertise of your business. To reflect this, your commercial agreement should reflect the lack of control (and lack of a right of control) over you and conversely, it should highlight your autonomy in carrying out the work, as well as where and when this will be achieved. Good luck!

The expert was Helen Christopher, chief operating officer at Genie Accountancy.