As a contractor, you will be asked to sign written contracts with either an agency or client. At first glance it can just look like pages of ‘legalese’ which make little sense. However, the wording can have a major impact on your IR35 status so it is vital that you are aware of what should – or should not – be in there.
Whilst you should always have your contract reviewed by an IR35 specialist, it is also a good idea for contractors to understand the basics of important IR35 clauses and terminology. Here are a few tips to help you identify the clauses you should pay specific attention to.
The amount of control exercised over you by the client is very important in determining your IR35 status. It is important to always consider whether or not the client has the right to exercise control over you as they would a permanent employee. This is demonstrated in how, when and where you provide the services.
Generally your contract will be on a project basis and you may be subject to a certain level of supervision due to industry or work place regulations. However, in terms of how you actually provide your services, you should have complete autonomy over your working methods, managing your own time and where possible, have the ability to work from your home or office.
Sometimes contracts will contain clauses stating the above, but more often than not they are silent on control. What you must avoid is any clause stating that you are working under the direction of the end client, or have to report to a line manager.
As a contractor, it is your responsibility to ensure that you have control in all aspects of your working arrangements with the client.
Having a right of substitution is probably the key test in respect of IR35 as it shows to HMRC that the engagement between you and the client is a business to business agreement, and that they are engaging with your limited company and not you as an individual.
As a contractor you should be able to exercise a right of substitution. This is where you send someone else to provide the service instead of you for a specific period of time. The substitute could be an employee of your company or another contractor. As long as the substitute has the sufficient skills and experience to provide the services to the same level as you, there should be no reason why the client cannot accept proposed replacement.
Whilst it is unlikely to ever actually happen, proving you have the right is vital when challenged by HMRC in an IR35 enquiry. Without it the enquiry will quickly swing to HMRC’s favour.
How are you able to prove this?
Firstly, it is imperative to have a substitution clause in your written contract, which is HMRC’s first port of call. Without it there is little proof to back up your argument.
It is also vital that any such right exists in reality. HMRC will quickly state that the contract isn’t worth the paper it’s written on if it does not mirror the true facts. To evidence your working practices you can complete a ‘confirmation of arrangements’ form, which is a simple document that both you and the end client sign. You can click to understand what a confirmation of arrangement form involves and how it can help massively in an IR35 investigation.
Mutuality of Obligation
It needs to be clear that there is no obligation on either party to offer or accept ongoing work. Check that your contract has a clear end date – it may well be extended but there should be a defined term to the initial agreement. It is also positive if the notice periods on either side are equal.
A clause in your contract demonstrating that you are taking on financial risk as a limited company will strengthen your case in an IR35 investigation. Taking a financial risk is a positive indication of being in business on your own account and is certainly a pointer towards a genuine contract for services. You should be responsible for rectifying any errors in your work at your own time and cost, which is a clear differential from a permanent employee. The requirement to hold business insurance, particularly Professional Indemnity, also backs this up.
If you require any more information, please contact one of our experts.
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