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With IR35 sticking around for the foreseeable future, it’s important freelancers are aware of its scope and impact. The absolute best way to stay outside IR35 is with a cast-iron contract. This can be a difficult and potentially time-consuming process. Long-term freelancers, who work through an intermediary company, will certainly wish to ‘IR35-proof’ their contracts in order to avoid the reduction in earnings and possible investigation from HMRC. Contracts will need to be checked for each job/project and they should highlight your status as a self-employed professional.
Not sure whether you fall under IR35? Check out our IR35 calculator to get a better idea.
To ensure your Contract is IR35 proof (i.e. so that you cannot be deemed an Employee) the contract should contain the following clauses:
Direction and Control are classic tests of ‘employment’ that could put a freelancer inside IR35. ‘Control’ appears in contracts as – start and finish times; specific days the freelancer should work on the contract; lunch break times; contract duration. Are there specific clauses stating that the client has direction and control over the Contractor? These clauses should never appear in a contract – freelancers control when and how they work, not the client. Having a project basis to the work performed is a crucial indicator of IR35 status.
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. If the hirer is only interested in your own suitability and skills and no substitute would be offered or accepted then any substitution clause will be ignored by a Court.
Does the contract allow the freelancer to take on projects from other clients simultaneously, or can the client veto other contracts? If the contract specifies exclusivity, simply states x hours per week at y 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 (This is what is meant by Mutuality of Obligation). Provisions to extend the contract should be avoided.
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 person in business on their own account. Ideally, a freelancer 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 normal.
Freelancers and 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 fail IR35 if there is a sound business reason for it. However, freelancers should buy their own equipment if practical and use it where possible. The contract should specify where the work will be performed.
This includes holiday, sick pay, pension – the contract should state the lack of these benefits. Note that with the introduction of the Agency Workers Regulations in October, Agency Workers (such as Contractors using Umbrella Companies) will be afforded the same benefits as permanent employees – the relationship between AWR and IR35 has yet to be explored.
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 fail IR35. The freelancer or 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.
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. If the intentions of the parties, that are expressed in the contract, bear no resemblance to the real intentions of the parties, the written intentions will be ignored by a Court.
The contract will be terminated at the end of the project or if there is a breach of contract.
Other things you should take into account are being able to demonstrate that you are “in business on your own account” – 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 and/or belong to a trade association.
Please note that the advice given on this website and by our Advisors is guidance only and cannot be taken as an authoritative or current interpretation of the law. It can also not be seen as specific advice for individual cases. Please also note that there are differences in legislation in Northern Ireland.
You might avoid a fine if a close relative died shortly before the self assessment deadline, you've been seriously ill, or if you had major IT problems.