With end-clients (other than small businesses) now responsible for determining IR35 status, it’s important that contractors can ensure the decision made by their client is the correct one.
This is particularly important where the financial impact of an incorrect determination can be significant.
An ‘IR35-friendly contract’ on its own is not enough. The wording must reflect genuine self-employment, and crucially, the contractor’s day-to-day working practices must match the contract.
What is an ‘IR35 friendly’ contract in reality?
A common route contractors take is to look for an ‘IR35 friendly’ contract template online, using it as a reference point.
When people talk about an ‘IR35 contract’, they generally mean an outside IR35 contract.
For a contract to fall outside IR35, the wording must demonstrate that the contractor provides their services in a manner consistent with self-employment.
However, simply downloading a contract and hoping this will convince a client that the engagement sits outside IR35 is rarely enough.
The same applies where contractors are engaged by small businesses, where the contractor is still responsible for determining their own IR35 status.
There are several reasons for this, explained below.
Working practices must reflect the contract wording
A so-called ‘IR35-friendly contract’ is of little value unless the wording accurately reflects how the contractor actually works.
If a contract states that the contractor is self-employed, but the working practices are closer to employment, the engagement may still fall inside IR35.
This is why HMRC and the courts focus heavily on the reality of the engagement, not just the written terms. See also control, mutuality of obligation and substitution.
Seb Maley, CEO of award-winning insurance firm Qdos, explained why this is an important point:
In the last few years, a number of high-profile investigations have hit the headlines. One case that demonstrates the importance of working practices is Kickabout Productions Ltd. v HMRC.
In this case, two contracts were scrutinised. The differences between the contracts were ambiguous about the requirements and expectations of both parties – in effect, failing to accurately reflect the working practices.
So while templates are a good starting point, it’s critical to tailor them to suit each contract and ensure that it’s an accurate reflection of the working relationship.
Clients may prefer to use their own contracts
Even if a contractor downloads a contract – or has one drafted on their behalf – clients and agencies will often insist on using their own terms.
This has become more common since the introduction of the off-payroll working rules.
Seb Maley continued:
Following the arrival of the off-payroll working rules, using your own contract isn’t likely to be an option. In such a situation, seeking advice on whether the engagement is inside or outside IR35 would be prudent.
Let’s say it falls inside IR35. If your client is open to it, it may be worth collaborating with them to make changes to that contract so it reflects an outside IR35 engagement. However, everything must be reflected in the working practices – this is essential.
IR35 contract review
IR35 contract reviews remain useful for contractors who want to ensure that a client’s determination is reasonable.
In addition to having your contract professionally reviewed, you may also want to obtain a working practices review.
This helps ensure that the contract aligns with how services are actually delivered day to day.
You can find out more in our guide to IR35 contract review services.
IR35 contract templates – free downloads and example clauses
You can download a range of IR35 contract template resources from the Qdos website, including:
- Sample contractor-agency contract
- Sample contractor-client (direct) contract
- Example IR35 clauses (covering substitution, control and mutuality of obligation)
Click here to access these resources.
Protect yourself against an HMRC IR35 investigation
Award-winning Qdos IR35 insurance – from just £99 per year. Covers £50,000 of legal costs + outstanding tax liabilities if you opt for TLC35. Contract review service also available.
