Working for yourself is the modern dream; however, there are responsibilities that come with contracting. Being aware of your legal duties towards your client, understanding the implications of your advice and designs, and making sure you’re paying the right taxes are all parts of being self-employed. So is making sure you have a good, fool-proof contract in place with every client.
Why is having a contract so important?
Many contractors - especially those that have recently made the jump, or are perhaps dabbling on the side – often overlook the importance of having a contract with their clients.
Contracts are used throughout our lives for various exchanges, from taking out a mortgage to enrolling on a course. Business is always a two-way affair, and a contract ensures that your needs as a contractor (i.e. getting paid) and their needs as a client (i.e. receiving a finished, fit-for-purpose product) are honoured.
While paperwork is definitely not what you signed up for when you became your own boss, a tailored contract for each client is a necessity. Read on for some reasons why contracts are so important when you’re self-employed.
It can improve your IR35 position
The whole purpose of an IR35 inspection is to determine whether you are operating under a genuine contractor/client arrangement, or whether it ought to be treated as a disguised employee/employer relationship (and taxed accordingly). As a rule, tax inspectors are more concerned with your proven working practices than with what the contract does or doesn’t say.
A well-written contract with your client will not, on its own, make you automatically IR35 compliant. Nonetheless, HMRC will want to see that contract; most likely, at the start of the inspection process. A suitable contract sets the scene and can be a way of getting any HMRC enquiries off to a positive start. It should accurately describe the nature of the arrangement, making it clear that you are not ‘part & parcel’ of your client's organisation but rather are individually accountable for the services that you provide to the client.
Just remember that you’ll also need to provide evidence to show that your working practices match what the contract says in light of IR35. You can read some examples of good and bad contract clauses to keep you outside IR35 here.
Contracts protect your business
Some contractors get very lucky with their clients and never have a problem. Most of the time, however, there'll come a misunderstanding down the line. It could be that you weren’t on the same page when you scoped out that latest project together after all and they want you to redo the work for free, or your payment is now 20 days late and bills need to be paid.
Working for yourself can put you in some vulnerable financial positions. It’s invaluable to have a contract in place that protects you from things like late payments, being paid less than what was agreed, or being expected to make extensive amends without charging for the time.
If the client has agreed on only two rounds of adjustments without further cost or to pay you within 30 days of receiving an invoice, then that has to be honoured by law. Knowing they’ve signed against it gives you the power to speak up.
Contracts protect your clients
I’ll reiterate again that business is always a two-way affair. Having clauses in your contract that protect the client show that you’re credible and trustworthy. It could also make them more willing to sign the rest of your specifications with little negotiation.
Horror stories where a client has hired a contractor and been left without a deliverable, be it a product, services or advice, are sadly common. Not only can this result in the client losing money, but it could also mean that they have difficulty hiring someone to finish a bad job.
Including a client protection clause may be the deciding factor that lands you the project, especially with a client who’s had a bad experience with a contractor before. It makes you appear more professional while reassuring your client that you take their work seriously.
Contracts boost your accountability
A contract is the best way to reinforce accountability on a project, to both the client and yourself. We’ve all had to sign a contract or legal document at some point and we know the implications if we don't keep up our end of the deal.
This kind of motivation is sometimes exactly what’s needed to meet a tough deadline, deliver your best work or get really innovative with a stale idea. If you know that you’ve signed up to a set of expectations, it can have a spurring effect on your approach to the project.
Of course, this works the same way for your clients. If they know that they’ve signed an agreement to pay you within a certain timeframe, they’re much more likely to do it. If you’ve specified that you can’t start work without access to a website backend or a set of assets, they’re obliged to deliver those things first.
Contractor insurance advice
It’s always best to get any contract that you’re considering using checked over by a professional. 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.