April 2020, otherwise known as when IR35 will be rolled out to the private sector, is rapidly approaching. There are reams of good advice on how to protect yourself from the off-payroll rules available from contractor forums, specialist IR35 blogs and contractor-specific insurance companies, but what can you do practically to prepare?

The best place to start to make sure you're outside IR35 is with a contract review, but what does that entail exactly? A contract review looks at your written client agreement clause by clause and applies it to the three key IR35 status test: Substitution, Control, and Mutuality of Obligation (MOO).

Read on for positive, outside-IR35 examples of clauses for each of the three tests, as well as pointers for what to avoid in your contract.

Do note that whilst very important, the aforementioned clauses are not the be-all and end-all of an IR35 contract review – they’re simply the largest indicators towards status. If you have any doubt as to the status of your contract, we would encourage you to get the written terms checked by an expert.

Substitution

Example outside-IR35 clause wordings

The Contractor shall have the right to provide the services using Representatives of their own choosing. The Contractor can substitute any Representative provided that the Client is reasonably satisfied that the substitute Representative is sufficiently skilled, experienced and qualified to carry out the services. The Contractor will remain liable for the Services completed by any substitute and will bear any costs.

The Supplier shall have complete discretion concerning which of its personnel perform the services and may provide a substitute whenever necessary. The Supplier warrants that such personnel will be adequately skilled and qualified. The Supplier shall bear any costs involved in providing a substitute.

Should the individual assigned to provide the services be unable to do so for any reason, the Supplier shall be able to provide a substitute, so long as such personnel are adequately experienced, skilled and qualified, and shall remain responsible for any costs associated in providing a substitute. The client has the right to refuse to accept a substitute, if in its reasonable opinion such individual is not suitable, due to lack of skills experience and qualifications.

Why are these clause examples outside IR35?

The key thing to note with substitution clauses is that the right to supply a substitute must be unfettered – that is to say it should not be unduly restricted.

If your clause states that you can substitute, but you need to seek approval, or consent in order to do so then this will be considered restrictive, as it essentially places the control over the right squarely in the client’s hands.

Similarly, if the client is able to refuse a substitute for any reason they choose, or “entirely at their discretion” this will effectively nullify the clause. A substitute can be refused, but they should only be able to be refused on reasonable grounds relating to a lack of skills, experience, knowledge or experience.

Another commonly missed aspect of a substitution clause would be financial liability for the substitute. For substitution to be genuine, it is crucial that your limited company remain responsible for paying a substitute. If you do not, HMRC will argue that it is in fact assigning (or at a push, subcontracting) and not true substitution.

What should I avoid in a contract to stay outside IR35?

  • Handover periods. These generally make a bit of a mess of substitution if there is an enforced handover period – if you are required to provide a 7 day handover for example, this will make you much less likely to engage a substitute as it will increase your own costs, and may not even be possible in the first instance should you fall ill. If the clause references a “reasonable handover period” this could be acceptable however, but it is dependent on the precise wording.
  • Direct Undertakings. Having the substitute enter into direct undertakings (whereby the individual signs specific agreements directly, and not via their company) with the client or agency can cause complications for IR35 purposes. Not only can it be seen to bind the individual to the agreement (thus implying a requirement for personal service) but it can also be damaging from a control perspective. Generally speaking, this is acceptable however so long as it is for legally required items only, such as Confidentiality or Data Protection.

Control

Example outside-IR35 clause wordings

The Client shall not have the right, nor shall it seek to exercise direction, control or supervision over the Contractor. The Contractor shall co-operate with any reasonable request of the client within the scope of the services, but it is acknowledged that the Contractor will be able to determine how best the services are provided and will have autonomy over their working methods.

The Supplier may at any time and without giving the client prior notification, make any changes to the specified service which are necessary to comply with any applicable safety or other statutory requirements, or make any changes to the specified service which do not materially affect the nature or quality of the specified service.

Why are these clause examples outside IR35?

For control the important bit to note is that the client should not be able to tell you how to do the work, they should simply be providing the overarching requirements and leaving it to your skill and expertise to get the job done. Anything that helps to indicate this will work in your favour for IR35.

It is reasonable for the client to provide guidance on what they need doing, but anything that implies they are micromanaging you, or that you are integrated more than an arm’s length resource should be, will be taken as indicators towards employment.

What should I avoid in a contract to stay outside IR35?

  • References to the client directing you, or instructing you. Should the client require you to “obey all directions” given to you by any member of staff, this could be seen as a means of controlling your services. It could be benign – for example in the case of health and safety this would be defendable – but it equally may not be. In these situations, look to replace the offending term with the word “requests” – “observe all reasonable requests” for example looks considerably better than “obey all directions”.
  • Clauses that stipulate precise working hours, or locations without good reason. If the client is telling you to work from 9-5 Monday to Friday with an hours lunchbreak, or stipulating that you must provide services on the client’s site regardless of if your services could reasonably be provided at home, there needs to be a very good reason for the stipulation. For example, working only at the client’s site may be allowable if what you need to work on is located on the client’s site, or if the client is especially security conscious. If the location or time of services is agreed between the parties however, and this is made clear in the contractual terms it will usually be seen as positive rather than a negative.
  • A requirement to adhere to employee specific policies and procedures. If you are required to adhere to (for example) a code of conduct, or disciplinary procedures that are in place for employees, this will not look favourably on you. You should only adhere to rules and regulations that would reasonably apply to independent contractors, such as health and safety, or data protection.

Mutuality of Obligation

Example outside-IR35 clause wording

The Client is under no obligation to offer further contracts or services to the Contractor nor is the Contractor under any obligation to accept any contract or services offered. For the avoidance of doubt, both the Contractor and the Client agree and intend that this agreement does not create any mutuality of obligation, either during or following the agreement.  

Why is this clause example outside IR35?

Whilst there’s not really much by way of wording that can be suggested for mutuality of obligation, the important thing is that there should be absolutely no expectation that work will be offered by the client, and that any offers that are made by the client (or agency) would be accepted.

The above clause makes this very clear, but it is key to note that this does not mean you cannot accept an extended contract, it should just not be a given that you will – ensure that an offer is made and that if you accept said offer and there is proof of this where possible (an email chain would suffice!)

What should I avoid in a contract to stay outside IR35?

  • Open-ended contracts. This is perhaps the biggest culprit we see that falls foul of mutuality of obligation. Open-ended contracts are akin to those operated by employees and should be avoided where possible. Ensure that any contracts you operate have a firm and fixed end date – if the client wants you to provide services past the end date of the contract, they should make an offer for you to review and accept or reject.
  • Automatically extending contracts. This is functionally very similar to the above, but another thing to watch out for. As with the above, I’d suggest ensuring the contract has a fixed end date and any extensions are negotiated.
  • No ability to terminate the agreement. Wherever possible, ensure you have the ability to terminate the agreement. If you are unable to terminate the contract for convenience at any point (with or without a notice period) then HMRC will argue there is mutuality of obligation between the parties. Ultimately having any form of termination right is better than having none, but generally speaking a shorter notice will be seen in a better light. 30 days or less is acceptable, anything above that is still good, but not ideal.

What can I do to protect myself against IR35?

Should you be concerned about your own IR35 status, we offer a full contract review amongst other services to help you prepare for April 2020. We’ll give an explicit pass or fail based on the current contract you hold, along with comprehensive comments on how to improve any problem areas.

We also offer IR35 tax investigation insurance (TILI) which protects against the court costs that could arise from an HRMC case. It also covers representation by a tax specialist at a tribunal.

For any further information or advice, please feel free to call us on 01163 800 400 or email us.

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