IR35 and contracts - How to spot a badly worded one

HMRC will carefully examine your contract to identify any sign of IR35. And whilst, since the Autoclenz judgement, your working practices will override any written contract, it is wise for you to pay attention to how your contract is worded, to ensure any potential HMRC investigation can be quickly closed down.

This of course only applies to contractors in limited companies of their own; contractors with PAYE Umbrella arrangements may work out what terms they like with their providers.

The use of certain terms in your contracts will make them seem like employment contracts, and will look suspicious to HMRC.

Contract for services

It is a good idea to format your agreement in a very different style to an employment agreement. Some companies merely adapt an existing contract of employment to a contractor's agreement, and this is not a good idea. Better use a different template.

For example, rather than specify 'job title and responsibilities' as you would in an employment contract, it is far better to specify that the contractor will perform 'the services' and define 'the services' in a separate schedule attached to the agreement.

The contract should be between the client/agency and the contractors limited company and under no circumstances mention a named individual. The schedule should describe the work to be done, preferably referencing a project by name, and the skills/services supplied. If an individual is named, then this should only be as the "lead consultant" who can be substituted at any time.

Intention of the parties

Your agreement should specify the intentions of the parties i.e. that contractors are self-employed, responsible for their own tax and national insurance and (usually) agrees to indemnify the Company in respect of the same. This is a formality for most contracts, but beware, it holds little weight. Since Autoclenz many contracts containing these clauses have been put aside in court with the working practices overriding the contractual terms. Examples are the Uber case, Addison Lee, and Citysprint cases.

Contractor engagements should be fixed

This is one of the key tests for employment status. It is very important that your contract be for a fixed term, and not automatically renewed. If you have a 2-year contract with one client, and it is renewable for 2 years, HMRC is going to ask some questions, particularly if you have few or no other clients. Arrange to renew your contracts after they run out if possible, and make informal arrangements concerning them.

Contractors should work their own hours

Your contract should state clearly that there is no ‘mutuality of obligation’ between the contractor and the client. This would be taken as a sign of employment status. In fact, it is one of the key tests for employment status used by the courts, as the relevant case law shows.

You should therefore be careful to show in the contract that you are able to set you own hours of work. If you work on the client’s premises, you should make it clear in the contract that at least part of the work may be performed elsewhere, if possible, and at the hours of your choosing.

Contractors pay their own expenses

Some clients are prepared to pay certain contractor expenses. This can be dangerous, as it can be seen as a sign of employability. Contractors should include expenses as part of their rate, or indicate that certain exceptional expenses will be covered.

Contractors don’t get to take holidays

You should not expect clients to pay for holidays, nor should you expect to take them. What you should do is to fix the contract periods with gaps in them so that there are breaks in between. Receipt of holiday pay is almost a sure sign of employment status and should not be accepted under any circumstances.

Contractors do not receive sick pay

The same rules apply to sick pay as those previously explained for holiday payments. This does not mean that you cannot get sick, only that you should not expect to be paid for the time you are out. You should ideally substitute for yourself if you get long term sick.

Contractors supply their own equipment

This may be difficult for you to arrange in practice, but the contract should at least state that you are responsible for the supply of you own equipment. You may well find yourself working with the client’s equipment, but at least you have undertaken to supply your own.

Contractors should find their own substitutes

One of the key tests of employment status is whether you must provide the services yourself—as an employee would—or whether a substitute can provide them. Every contractor should be certain to find substitutes as opposed to working in own person, and to provide them if necessary.

The courts have repeatedly looked to the right of substitution as a proof of employment or of contractor status. It’s not a guarantee in itself that contractor status will be accepted, but it is a strong indication.

Updated: Saturday, September 30, 2017

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