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Contracts are crucial

Last updated: 05 April 2022

Contracts are crucial

Since the introduction of the IR35 rules contracts have never been more crucial for contractors and freelancers. Contracts outline what each party wants, needs and expects, but perhaps more importantly, they also form a legal framework to work within. Whether the contractor is using an agency or working directly with a client, a contract will provide a formal definition of business within a legal framework. Some contracts may fall inside IR35 and some outside. But because of IR35 confusion many clients insist on outsourcing contracts through agencies. Around 75% of contract work is now secured via agencies and many others use “preferred” clients.


What should I look out for?

It is vital to have a contract for services between your company (whatever its status), and your end-client or agency. This contract should include the specific clauses outlined below so that HMRC does not view you as being within IR35. The contract should outline the work being done and the relationship between the parties.

In particular there should be a substitution clause that allows the work to be performed by another person provided by your freelance business. Of course your client will probably want terms relating to a right of veto, depending on suitable qualifications etc, which should not be a problem. But it is important you have the right to allow someone else to perform the work if necessary. Equally important is a clause that specifies that there is no “mutuality of obligation” between the parties. This simply means there is no obligation for you to work and for them to pay you – unlike an employee of a company. Make sure this is clear.

In addition there should be a clause stating that you will not be subject to supervision, direction or control as to the manner in which you fulfil the agreed services. As a professional you will use your own initiative as to the manner in which the services are delivered.

These clauses are crucially important if you don’t want HMRC eying you up for IR35. But they are just one part of a contract, and it is vital to pay equal attention to all the other clauses in the contract document. Each contract may be different, depending on the client, or you may work in such a way that you can modify your own draft contract accordingly.

Increasingly contracts from agents are seen as “good” if they fall outside IR35 and are on proper business terms and “bad” if they restrict your ability to look for work or place liability on you, or worse still, your family. These “bad” contracts in fact look more like contracts of employment than business contracts. And if you are going to have a contract of employment you might as well just work for the company and be paid PAYE. Of course companies don’t want that either!

However, it is crucial to take advice. There are plenty of specialist agencies, but you could do worse than contact the professional contractors group, which is a not for profit organisation set up for freelancers. It offers members a selection of draft contracts vetted by experts in commercial, employment and tax law. Draft contracts and templates include agency agreements, standard terms and conditions, mutual secrecy agreements. Members can also have other contracts reviewed by experts. It costs from around £120 a year and there are many other benefits.

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