This is a difficult and potentially time-consuming process. Long-term freelancers will certainly wish to ‘IR35-proof’ their contracts in order to avoid the reduction in earnings. Contracts will need to be checked for each job/project and they should highlight your status as a self-employed professional.
To ensure your Contract is IR35-proof (so you are not deemed an Employee) the contract should contain the following clauses:
- Supervision and Control. These are classic tests of ‘employment’ that could put a contractor inside IR35. ‘Control’ appears in contracts as – start and finish times; specific days the Contractor should work on the contract; lunch break times; contract duration. Are there specific clauses stating that the client has supervision and control over the Contractor? These clauses should never appear in a Contractor’s contract. Contractors control when and how they work, not the client.
- Substitution. Another classic test of ‘employment’ is whether the Contractor can provide a substitute to do the work. If they genuinely can ‘substitute’ and on occasion actually do, then there is little doubt that the contract is IR35-proof.
- Mutuality of Obligation. Does the contract allow the Contractor to take on projects from many clients simultaneously, or can the client veto other contracts? If the contract specifies exclusivity, simply states a number of hours a week at a given rate on an ongoing basis, and requires the Contractor to take whatever work the client throws at them, then this indicates an IR35 failure. An IR35-proof contract must state the Client has no obligation to offer you more work and you have no obligation to take it. Provisions to extend the contract should be avoided.
- Financial risks. Regular, guaranteed weekly or monthly work specified in a contract looks more like an employee’s ‘contract of services’ rather than professional fees paid to a Contractor. Ideally, a Contractor should invoice when project milestones are completed. If the client requires a weekly invoice, then it should detail work completed as well as hours worked and the rate. Any mistakes made during the contract must be rectified in the Contractor’s own time, and the contract should say this. A requirement to maintain professional indemnity insurance is also normal.
- Equipment and Premises. Contractors often find that they are required to use the client’s equipment, possibly for safety and security reasons. This is generally not an issue that would make a contract fall inside IR35 if there is a sound business reason for it. However, Contractors should buy their own equipment if practical and use it where possible. The contract should specify where the work will be performed.
- Employee Type Benefits. For example holiday, sick pay, pension etc. – the contract should explicitly state the lack of these benefits.
- Part and parcel. If a contractor becomes so integrated into the client’s organisation that they, for example, appear in organisation charts, have staff reporting to them etc., then they are behaving exactly like an employee and the contract could fall inside IR35. The Contractor should distance themselves from the client’s corporate structure and only take on responsibilities not specified as part of the project when this is industry norm, such as, for example, safety responsibilities.
- Intentions of the parties. The contract should always clarify the intentions of the Contractor and client (or agency) to be one of supplier and customer and not employee and employer. The nature of the work should be described accurately.
- Termination. The contract will be terminated at the end of the project or if there is a breach of contract.
- Business on your own Account. Being able to demonstrate that you are in business on your own account is key to avoiding IR35. You may not have stock, premises or staff but you will probably have a home office, a website, be VAT registered, have business stationery, buy advertising, submit invoices, take out insurance, have other clients and an accountant, purchase equipment or belong to a trade association.