IR35 Compliant Contracts

The contract for services that relate to the work that will be carried out on a particular assignment plays a key role in determining a contractor’s employment status. It is therefore important to consider the contract from an IR35 perspective. The contract sets out how all parties intend to work together on the assignment, so it is therefore essential that you set out on the right foot.

Here are some key pointers for achieving an IR35 compliant contract:

  1. Ensure that the contract is between the contractor’s limited company and the Agency or END-HIRER

The contract should not relate personally to the individual deployed to provide the services. Naming the individual as a party to the contract suggests that the contract is one for the individual’s services (i.e. a contract of employment) as opposed to a contract for services between two limited companies. The contract is between two companies and it is therefore essential that the limited company is both a party and signatory to the contract.

  1. Ensure that the contract covers the contractor’s entire involvement in the project and not just a period of time

Agreeing what work the contractor will undertake at the outset will ensure that the fee charged is appropriate for that work. It will also demonstrate that the contractor has been engaged for a specific project rather than providing services as and when needed. By agreeing a set of deliverables at the beginning, it ensures that other tasks will not be imposed on the contractor which fall outside the project or the scope of the original contract.

  1. Ensure that No “mutuality of obligations” Are PRESENT

This will mean inserting a clause into the contract to state that that neither the Agency nor the End-Hirer is obliged to offer the contractor work, but if they do the contractor is not obliged to accept the work. Including this clause in the contract will support the fact that neither party intends to create a “mutuality of obligations” which is a common element of an employment relationship.

Clearly, if you want a contractor to undertake additional work for you, they should be able to charge for this separately and re-negotiate the contractual terms before undertaking the work.

  1. Ensure the contract allows for the right of substitution

A right of substitution is a fundamental element of IR35, which enables a contractor to provide a substitute worker to carry out the work if they for some unknown reason cannot. So, it is essential that the contract contains a clause which provides for this right as and when required. Whilst the right to provide a substitute should be exercised in practice, to help demonstrate that it is a valid right, it is not essential that the right is exercised but it would need to be proven that the right is valid and could be exercised.

Such a clause should not unreasonably restrict the right as it is an important element in defeating a challenge under IR35. Where a contract contains an unfettered right of substitution, the contractor is afforded the right to provide a substitute at their own discretion without the need to gain the End-Hirer’s acceptance, which makes it very difficult for the contractor to be seen as providing a personal service and therefore inside of IR35.

  1. Ensure that the contract reflects the fact that the contractor is an expert in the field

Having a clause which states that the contractor will not be directed, supervised or controlled as to how they carry out their services demonstrates that they are an expert in their field and are not subject to the level of control which you would expect to be exerted over an employee.

It is reasonable to expect an Agency or End-Hirer to require the contractor to comply with certain Health and Safety processes or other site requirements whilst working on the assignment. It is also reasonable for the Agency or End-Hirer to retain some right to co-ordinate the contractor’s work into a larger project and request periodic progress reports.

However, it is important to remember that the contractor is engaged for their specialist skill and experience. The Agency and End-Hirer will not want to have to tell them how to do their job and it is reasonable to have this reflected in the contract.

  1. The contractor should have the right to work for other End-Hirer’s

“Being in business of its own account” means the contractor should not be tied to providing services to one End-Hirer and should have the ability to profit from their own sound management. They will need to be able to provide services to whomever they choose and having a clause in the contract to reflect that this non-exclusive arrangement will help demonstrate independence between the parties.

  1. The contract should specify the level of insurance a contractor is expected to have, as well as the extent of each parties’ liabilities

All independent contractors are at risk if their work is substandard, impacts or delays a larger project and it is reasonable for the independent contractor to accept this risk. However, in order to minimise their exposure to financial risk, their liability should be limited to the insurance cover that they have in place. It also makes good commercial sense to negotiate the level of insurance required at the outset so all parties understand the extent of their potential liability and that they are covered with relevant insurance.

  1. Set out in the contract what training and equipment is expected of the contractor for the assignment

It is good to demonstrate that the contractor is investing in their company and not relying on the End-Hirer for the tools and equipment they need for the work.

This is of course unless there is a good reason for not providing their own training and equipment such as specialist nature of the tools required for the work.

Read more about the cost of non-compliance with the off-payroll rules in the private sector.

Non-compliance in the Private Sector