All parties in the supply chain should pay greater attention to the existence and wording of their termination clauses, as these could have a part to play in keeping contractors outside IR35.
Termination clauses and notice periods vary considerably from contract to contract. Most are designed to protect the client from the sudden departure of a contractor mid-contract, and some, dangerously from a status viewpoint, are negotiated to provide a safety net for the contractor to find alternative work.
However, the wording of the contract termination clause could push an IR35 status into the direction of being "inside IR35."
Termination clauses can provide a tax tribunal or court with insights into the level of mutuality of obligation between contractor and client and therefore IR35 status. So, though not a key factor in isolation for determining whether a contractor is inside or outside IR35, the termination clause could be what swings the decision in a borderline case.
Not having a termination clause would be best
It is recommended that wherever possible termination clauses should only be included to cover the most serious breaches, such as where a contractor makes a serious and costly error or is giving away trade secrets - basically a breach of the contract.
From an IR35 point of view, the best kind of termination clause is one that doesn’t exist, so that there is no notice period either way - so either party can terminate at will. But that is an unrealistic scenario, particularly as most clients will insist on a termination clause to protect their projects and deadlines.
Notice periods in termination clauses can indicate mutuality
So why should termination clauses be left out of contracts? If a project ends naturally ahead of schedule and a contractor stays on because the termination clause says there are four weeks left to run, it is likely the client will be finding the contractor new things to do, and that points strongly towards sufficient mutuality of obligation and control, which are important factors placing contractors inside IR35.
The absence, however, of a notice period is not conclusive. But if there is no notice period it is indicative of self-employment and, when viewed with the rest of the evidence, not having that notice period could tip the decision in the contractor’s favour.
The converse is also true. When the contractor takes on any work simply to work out the notice period, despite the original project having been completed, this could place the contractor inside IR35 when viewed alongside other evidence.
Think of it this way - when a builder comes to build an extension on your house, if they finish a month early (this is a hypothetical situation of course!), you are not obliged to find them other work to do, like build a brick wall to make up the time. They get paid for only the work they have done, and they finish once it is done. It's the end of the project that defines the end of the services, not a specific amount of hours provided.
Oddly, many contractors have been known to try to negotiate termination clauses in contracts to protect their downside if the client wants to terminate early - but this is not sensible, as it is a pointer to guaranteed work, and therefore being "inside IR35".
Case law is at odds with HMRC position
HMRC are still sticking to their guns on mutuality of obligation (MOO), claiming that MOO just means someone is getting paid for doing work. This is despite two key rulings on MOO that have indicated otherwise.
In RALC Consulting , a First-tier IR35 case won by the contractor, Judge Jones stated: "Although there was some mutuality of obligations in respect of the requirement for payment if work was done, it did not extent beyond the irreducible minimum in any contract to provide services nor demonstrate the relationship was one of a contract of service." and (para 480) "....Mr Alcock would only be paid if he worked with no guaranteed obligation on the part of his end clients to provide him any work during the contracts."
In the Upper-Tier case for PGMOL v HMRC  UKUT 0147, Mr Justice Zacaroli also disagreed with the simple version of MOO presented by HMRC - "We reject HMRC’s contention that the requirement that there be mutuality of obligation is irrelevant to the categorisation of the contract as one of employment or one for services, beyond merely requiring that the services be performed personally.’ Furthermore, Zacaroli added: 'We think it is insufficient to constitute an employment contract if the only obligation on the employer is to pay for work if and when it is actually done."
At the time of writing (Dec 2020) RALC Consulting is due to head to the Upper-Tier Tribunal, and PGMOL to the Court of Appeal. The results of those, particularly PGMOL could mean HMRC finally has to conceed their position on mutuality of obligation.
Mutuality of obligation is still one of the key factors in IR35 cases. Tribunal judges are beginning to to disagree with HMRC’s simplistic view that mutuality is assumed where contractors accept work offered to them and are paid for it. Notice periods and termination clauses are likely to then serve as key indicators in cases.