A well-written contract with your client will not, on its own, make you automatically IR35 compliant. That said, vague or misleading terms will almost certainly raise alarm bells with the taxman! If you want to avoid a needlessly drawn-out investigation process, and to increase your ability to prove that the arrangement falls outside of IR35, it’s definitely worth looking for ways to improve your contract position.
Your contract: why it’s important to your IR35 status
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.
Nonetheless, the HMRC inspector 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. As for the contract itself, here are the areas you should pay attention to…
Keep it business-to-business to stay outside IR35
The contract should make it clear that this is a business-to-business arrangement. Your client has engaged your limited company to provide a specific service.
To avoid the suggestion that this is an employment relationship, and stay outside IR35, the contract should avoid any inference that the client is hiring you personally. A substitution clause is one of the most effective ways of establishing this. This should state that you have an unrestricted right to choose and supply a suitably qualified person to undertake the work.
Your IR35 position here is improved even further if you actually draft in a substitute at some stage when the contract is underway (and keep all records relating to this).
Keep contracts project-based as opposed to role-based to stay outside IR35
Your limited company has been contracted by an energy business to oversee the upgrade of a plant. It is estimated that the project will take nine months.
The contract should make it clear that your company is hired to deliver on this specific project. Be wary of including any specific dates for termination of the agreement - as this would make it look suspiciously like a fixed-term contract of employment, thus placing you inside IR35.
You can improve your position here further by stipulating a fixed fee for the delivery of the project. Just remember that if the need for additional services arises once the project is underway, you will need to agree on additional fees for this extra work - and to document this.
Control: your client is not your boss
In an employment arrangement, employers are able to exercise close control over what, where, how and when their employees work. As a contractor, you should aim to show that this control is absent: i.e. so long as you provide the agreed service, it is basically up to you to decide how it gets done. This will keep you on the right side of IR35.
The contract should avoid references to start and finish times, break times and specific days you will work. Where practical, it is also useful for the contract to state that you are responsible for supplying your own equipment.
So let’s say your company has been engaged to take charge of a data migration project. Your client wants to minimise disruption, which means the work will need to be carried out in daily chunks and outside of normal working hours. As such, your client wants to stipulate in the contract that you will work on the project daily, between the hours of 7 - 10 pm.
The trouble is, from an IR35 perspective, this strongly suggests that the client has close control over your activities (and particularly when you work). It is far better for the contract to make it clear that you have the freedom to set your hours; perhaps by stating that the client agrees to give you round-the-clock access to all relevant systems and that you agree to take all reasonable steps to minimise operational disruption (on the understanding that this will mean not migrating any data during office hours).
Staying outside IR35 while getting paid: it’s an instalment, not a salary
In a very simple contract for services, the contractor is paid the pre-agreed amount on completion of the work. For more complex, time-consuming projects, this is not practical (not least, for your own cashflow reasons).
To stop you looking suspiciously like a salaried employee (and placing you inside IR35), the contract should not include any references to regular, guaranteed payments. Ideally, it should give you the ability to submit invoices for specific milestones once they are completed. It should also make it clear that if you make a mistake, it is up to you to rectify it - and at your own cost.
Protect your IR35 position
For lots of helpful hints and tips on maximising the chances of proving that your contract lies outside of the scope of IR35, explore our Knowledge Hub.
If you’re concerned about IR35, we offer a range of contract reviews with comprehensive advice on how to stay outside the legislation. We also offer IR35 Tax Investigation & Liabilities insurance (TILI), which includes tribunal defence from our resident tax and IR35 expert Andy Vessey ATT as part of the policy. Andy is also available for IR35 training, conferences and specialist commentary on the off-payroll rules. Please get in touch.