Why an ‘IR35 friendly’ contract must reflect reality

Since the introduction of the off-payroll working rules, HMRC has investigated contracts completed prior to reform, whether held by public or private sector end-clients.

Contractors engaged by small businesses (who retain responsibility for determining IR35 status and are liable for non-compliance) face similar scrutiny.

As such, it’s vital that contractors take every reasonable step to ensure their IR35 compliance, whether they determine their own status or their client does it.

Seb Maley, CEO of Qdos – an IR35 insurance provider, among other things – outlined why IR35 compliance involves far more than drawing up a compliant contract.

An ‘IR35 friendly’ contract is not enough

Thousands of contractors arrive on the Qdos website looking for ‘IR35 friendly’ contract templates every month. And while a robust contract is a good starting point, there is more to think about than this alone.

A common misconception amongst rookie contractors – and sometimes even established ones – is that having an IR35-compliant set of written terms and conditions means you are definitely outside IR35. This is a myth. In reality, IR35 revolves around far more than the written contract alone.

If HMRC discovers the working relationship doesn’t match what’s included in the contract, the tax office could argue that the contract isn’t worth the paper it’s written on.

Therefore, you can have the best contract in the world, but if you’re treated as an employee in reality, chances are that HMRC will deem you to be inside IR35 – even if your client hasn’t.

How to comply with IR35

To comply with IR35, the terms of the written contract and a contractor’s working practices should both demonstrate that the contractor is in business on their own account, and not a ‘disguised employee’.

For this reason, we always suggest that contractors send their contracts to a specialist IR35 contract review service provider and liaise with either recruitment agencies or end-clients to make any necessary contract amendments.

Alongside contract reviews – which focus on the contractual terms of a relationship – it’s advisable to consider having a working practice review. This will eliminate any concerns about your everyday service delivery if HMRC opens an enquiry or investigation.

Further Information

You can find in-depth advice and links to service providers in our Guide to IR35 contract review services.

The following guides explain how to comply with IR35 in more detail:

  • IR35 Factors – the factors which are used in determining the IR35 status of a contractor, including working practices and contract wording.
  • Confirmation of Arrangements – a letter from the client which confirms the true nature of the working relationship between the client and contractor.

If you want to look at some sample draft ‘IR35 friendly’ contracts, you can download a variety from the Qdos resources section.

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.

Last updated: 12th August 2023