This is a good question, and one we are asked frequently at Bauer & Cottrell! Shares and stock options are not unusual in start-ups and scaling businesses, and we usually get asked the question by contractors working for small or overseas clients in this position. In these circumstances, responsibility for deciding the IR35 position sits with the contractor, since small and overseas companies are not subject to the newer Off-Payroll Working rules.

So, will entitlement to client shares affect your IR35 position? The short answer: they will not automatically put you inside IR35 in isolation, but they can increase the risk depending on the other features of the engagement and if not handled carefully.

How shares / equity may feature in contractor engagements

Shares could be offered as part of the agreed fee structure (cash plus equity). Sometimes they are framed as a reward for reaching delivery milestones, staying through a product launch, or helping the business reach investment targets.  Equity can be sold for payment, retained as an investment, or provide future returns.

The issue is not whether shares are “allowed”, but what the arrangement says about the relationship between the contractor and the client, and how this factor fits into the wider IR35 picture.

Employee share arrangements and “integration” risk

When considering at an IR35 position, we need to start with one overarching question: Does this arrangement look more like employment, or more like an independent business providing services?  The IR35 risk will depend heavily on how the shares are offered, documented and linked to the work.

Some end clients have share schemes and incentive plans that are expressly designed for employees. Where the shares are offered to the contractor on the same basis as the client’s staff, or under an internal incentive plan that is clearly designed to motivate employees, that can create problems and strengthen an argument that the contractor is integrated into the organisation.

Integration then tends to sit alongside other factors that matter far more in an IR35 enquiry, such as control over what you do and how you do it, a requirement for personal service and mutuality of obligation (expectations of ongoing work or availability).

Where those issues are already borderline, employee-style equity will simply be another factor that points to a position of employment, and the engagement would therefore be at high risk of being caught by IR35.

Shares offered to your company vs shares offered like an employee benefit

If a contractor wishes to accept shares, best practice is to ensure the equity element is clearly documented as a separate commercial arrangement, not bundled into employment-style incentives.  Where shares are offered under terms agreed between the client and the contractor’s business, sitting alongside commercial fees, this tends to look more like a genuine commercial bargain rather than an employment-style reward.

You want the documentation to demonstrate that the client is buying services from a business on commercial terms, and the equity element is part of a negotiated commercial deal (or a separate investment decision), not an employee benefit.

It also needs to be clear whether the shares are consideration for services (and how they are valued), or a separate investment opportunity that happens to be offered alongside the engagement.  Sloppy wording can cause problems, particularly where it implies the contractor is being rewarded for loyalty, retention or “being part of the team”. 

Whether the entitlement to shares sits with the contractor’s company or the individual can also have tax and commercial implications outside of IR35. It is worth understanding and discussing the position with your accountant before signing anything.

With overseas clients, equity offers sometimes arise through broad incentive plans that cover both employees and non-employees. In those cases, the offer may not be intended to integrate the contractor and may simply be the client’s default approach.

In any case, if the arrangements are documented properly and the engagement is otherwise demonstrably outside IR35, the equity element should be easier to defend and not have a significant impact in isolation – leading us nicely on to the next section!

Outside IR35 needs to be demonstrated in the overall engagement

Perhaps most importantly, the offer of shares should not be considered on its own. You must consider the engagement fundamentals and how the relationship operates day to day.

When considering client share arrangements, contractors should consider whether the major IR35 status factors stack up in their favour. In particular:

• Personal service: is there a genuine, workable right of substitution?
• Control: does the client have limited over what you do and how you do it?
• Mutuality of obligation: is the engagement project-based, or does it imply ongoing obligation and continued service?
• In business on your own account: are you clearly operating as a separate business with commercial terms and independence?

All of the above should be covered in the written contract and genuinely reflected in the working practices. If these factors are weak, entitlement to client shares may make things look worse by reinforcing long-term relationships and integration.

Conclusion

Entitlement to client shares doesn’t automatically put an engagement inside IR35. But it can increase risk if:

• it mirrors employee share schemes
• it strengthens the impression of integration
• it is tied to retention and continuity
• the broader working practices of the working relationship are already borderline

If you are in doubt, get advice and have the contract reviewed by an IR35 specialist before you sign.