To successfully avoid IR35, both the terms of a contract for services, and the working practices of the individual providing these services must demonstrate that the worker is in business on their own account, and not merely a disguised employee. Here, we discuss the importance of contract wording and provide links to example IR35 contract templates for you to download.
Since 2000, when IR35 was first implemented, a burgeoning ‘IR35 industry’ has built up, with a multitude of limited company accountants and employment status experts happy to provide IR35 contract reviews and advice.
What is a so-called ‘IR35 friendly’ contract?
Of course, an ‘IR35 friendly contract’ refers to a contract to provide services which demonstrates that a worker is not caught by IR35. Whilst many agencies promote their contracts as ‘IR35 friendly’, each engagement should be reviewed individually, including the working practices, and the term ‘IR35 friendly contract’ should not be relied upon.
Important points related to IR35 contracts
- The contract between contractor and agency (or end client if working direct) should demonstrate self-employment.
- The lower-tier contract (contractor-agency) should mirror the terms of the upper-tier contract (agency-client).
- The contractor’s working practices should mirror the terms of the contracts. They should show that he/she works in a manner more akin to a self-employed individual than to a permanent staff member, which could indicate that he/she is a ‘disguised employee’ (as per the HMRC term).
- We would recommend using a specialist IR35 contract review provider before starting a new contract. They will be able to negotiate contract clause changes with recruitment agencies, as well as providing an opinion as to your risk of an IR35 investigation.
Key clauses within written contracts
Although there are numerous factors which will establish whether or not a worker is caught by IR35 or not, there are three key employment tests which provide the strongest indicators of a worker’s true IR35 status.
The right of substitution is considered important to contractors wanting to legitimately work outside IR35. To strengthen an outside IR35 position, you need to be able to show that your client doesn’t need you to personally provide the services agreed upon in the contract – and that any individual with the right skills, qualifications and experience can carry out these services if you are unable to yourself.
- Exercising your right of substitution is a way to demonstrate that it is genuine, but you should only exercise it out of a genuine need to.
- Having a substitute ‘ready to go’ and one that can be called upon as and when also helps point towards its legitimacy but it is the right which is important, rather than the logistical capability.
- Make sure there are no lengthy handover periods, given this could hold up the delivery of your service to your client.
- To be a genuine substitution, the services must remain the responsibility of your company and the substitute paid by your company also.
While it is of course acceptable for a contractor operating outside IR35 to mutually agree to deliver a particular task at a specific time and from a client’s office, you should be able to execute the work as you see fit. In other words, your client should never have direct control over the way in which you provide your services. Failure to ensure this and you could be viewed as an employee.
- Make sure your contract doesn’t specify where you provide your services from (unless pivotal to the provision of these services).
- Your client shouldn’t be able to dictate your working hours.
- Appraisals and direct reporting to a ‘manager’ should not take place, nor should you have to abide by employee guidelines (statutory policies such as safety guidelines are acceptable)
- How you provide your services – i.e. the process used – should be up to you and not controlled by the client. This is the most important factor for control.
- Control can be considered a moot point if the services provided are so specialist that the client would not be able to instruct or supervise in your method of working.
3. Mutuality of Obligation
Mutuality of Obligation (MoO) refers to an employer’s obligation to provide work to an employee and the employee’s obligation to accept and carry out this work. For contractors to safely work outside IR35, MoO should not exist in the contract nor in the working practices.
- Ensure there is a start and end date to the contract, ideally it should not be rolling.
- When the contract ends, negotiate a new one with a completion date.
- Say ‘no’ to work that doesn’t fall under the terms of the contract.
- Ensure any work which is out of scope requires a new contract and payment terms.
- Insert a termination clause to the contract, allowing for both parties to stop working with one another within a defined period of time.
In addition to these three key status tests, outside IR35 status can be strengthened in the following ways:
- You are not ‘part and parcel’ of the client organisation, meaning you use your own equipment and do not enjoy staff benefits or privileges.
- You work on multiple projects simultaneously and have multiple sources of income.
- You shoulder ‘financial risk’, and are liable to correct mistakes in your own time and at your own expense.
- You operate as a genuine business, have operating costs, perhaps even a company website and are covered by business insurance.
IR35 contract template downloads
Qdos Contractor has several free templates which may be useful to contractors, including model contracts for contractor to agency, and for contractor to client (if working direct).
Contracting directly with your end-client
If you are contracting directly with your client, it is important to have a written contract in place. If you do work for a client on a verbal basis – although this may constitute a valid contract, it is much more difficult to prove your employment status in the event of an HMRC IR35 enquiry if you don’t have a written contract for services in place.
Contracting via a recruitment agency
Most contractors work for clients via recruitment agencies. In almost all cases, your agency will provide you with a draft written contract prior to starting a new role. This template should give you an example of what will typically be contained within the contract, and may highlight things which may be missing, or could be improved. It is worth noting that the ‘upper level’ contract between the agency and the client may also impact your IR35 status.