Importance of the contract

From reviewing the guidance on Status Assessment you will have a good idea of how HMRC will assess relationships between professional Freelancers and Hirers in deciding how IR35 will apply. From this, you can link to the contract that you will be signing with the Recruitment business or Hirer.

Remember that it is the actual relationship between the Hirer and the Freelance Professional that is being assessed. The contract merely records this relationship. However, it is likely to be one of the main indicators that HMRC will look for. The following chart looks at typical main Agency terms and shows how they might be amended to make them more likely to help Pass an IR35 assessment.

Typical Contract Terms

  • Specifies the name of the service company AND the name of the Contractor.
  • A ‘Notice Clause’ is included in the contract.
  • Weak or no compensation clause.
  • Professional Indemnity Insurance is optional.
  • The Contractor is paid a fixed hourly/daily rate, and the number of hours/days is set.
  • The Contractor must work his/her 40 hours regardless of workload.
  • The Contractor is obliged to work the 40 hours on client site, using client equipment.

IR35 ‘Friendly’ Version

  • Will specify the name of the service company only.
  • No notice or very restricted notice is favourable.
  • Include/strengthen the compensation clause.
  • Insist on PI Cover
  • For a 6 month contract, 40 hours per week, at £25 per hour, the total is £26, 000. The Contractor is contracted to complete a task over a set period (say 6 months). A budget will be set for the completion at £26, 000. Various monthly ‘achievable’ benchmarks will be set. For example, each month, if benchmarks are met, make a payment of £4, 000. If the contract is met inside 6 months the final payment of £6000 is made.
  • If the Contractor meets the contract terms early the payment can be made early. If an anticipated 6-month project is completed at month 5, the final payment of £10, 000 is made in month 5.
  • The Contractor can work whenever and wherever he/she pleases, so long as they get the job done.

Explanation

  • This will enable the service company to substitute one person for another. The contract should allow an ‘unfettered’ right to substitution.
  • Notice is given in employed contracts. Professional Freelance workers, delivering a project, should be terminated for breaches, or for non-delivery.
  • This indicates that the Contractor can suffer a financial loss if the contract terms are not met.
  • This again indicates the Contractor could suffer a financial loss.
  • Some typical contract terms indicate a relationship of ‘control’ by the client, over the Contractor. Future contracts should put the onus on the Contractor to complete tasks. The larger final payment upon completion indicates that the Contractor has the facility to make a financial gain if he/she delivers. This also avoids the Contractor being paid a set, regular amount.
  • This indicates ability for the Contractor to financially benefit from the contract terms. Incidentally, this will be a better result for the clients who set budgets for a task. If it’s completed early, so much the better.
  • This again removes some of the issues around‘control’. It also specifically removes two key HMRC tests relating to the supply of tools’ and the location of the worker’.
These pointers are included for information purposes only, to help you understand how a contract can help or hinder an IR35 status assessment.

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