As we know, the introduction of IR35 makes the hiring company responsible for determining whether a contractor working through a limited company is a ‘deemed employee’ (and therefore expected to pay income tax and National Insurance Contributions (NICs) as if they were employed), or considered fully self-employed.
It’s a complex undertaking that requires plenty of preparation ahead of the April 2021 deadline. Getting contracts right is one way to ensure this is made crystal clear.
What is an IR35 contract?
An IR35 compliant contract will clearly set out how all parties intend to work together on the particular assignment the contractor has been brought in to undertake.
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IR35 contracts: what should employers include?
There are eight key things that an IR35 contract should include to ensure compliance with the new intermediaries legislation.
1. Ensure the contract is with the limited company, not an individual
The contract should be made between two companies: the end hirer and the limited company. If the contract were to be with a named individual, this would suggest that the individual rather than the limited company is being hired, and the individual should be treated as an employee.
2. Cover a specific project, rather than a period of time
Any contract should demonstrate that the contractor has been hired for a specific project with a specific fee. Simply being asked to provide services as and when they are needed could affect IR35 status.
3. Add a clause to remove “mutuality of obligations”
The contract should make it clear that the hiring company is not obliged to offer work to the limited company, and that the contractor can turn down any work offered.
4. Allow for the right of substitution
The contract between the hirer and the limited company should allow for a substitute worker to complete the work if the normal contractor cannot. This reflects the fact that it is not an individual providing the service, rather a limited company.
5. Defer to the contractor’s expertise
Any contract should reflect the fact that the contractor is an expert in their field and so not subject to the level of control that an employer would have over an employee. However, it is perfectly justifiable for an IR35 contract to include compliance with on-site health and safety processes, or to ask for updates on progress.
6. Allow the right to work for other companies
Any arrangement between a hiring company and a contractor must be non-exclusive: the contractor must still have the right to carry out work for other end hirers.
7. Specify required insurance cover and liabilities
The contract should set out what the contractor’s liabilities are in the event that their work is substandard, or that delays impact on your wider business. This should be discussed in advance of the contract being signed, so they can ensure that this is in line with their insurance cover.
8. Detail any training and equipment that is required
Contractors must not be reliant on the end hirer for equipment or training. The contract should detail what training and equipment the contractor will need to have invested in in order to complete the project. There are some exceptions to this rule, however – for example, IT contractors who need to use a computer belonging to the hiring company, so they have access to the client’s systems and the right level of security.
Why an IR35 contract must reflect reality
An IR35 contract is vital to demonstrate that the agreement between an agency or end hirer and the contractor is outside of IR35 regulations – but the contract must reflect the reality of the working arrangement. HMRC can still investigate if they believe that a contractor is working inside of IR35, even if their contract suggests otherwise.
For a detailed review of IR35 for hiring companies, download our handy guide.
If HMRC discovers – from talking to both the end user and the contractor – that the scope of the work is actually that of an employee, then the contractor will be deemed an employee despite the contract stating that this is not the case.
What this means is that now is a good time not only to review the wording of your contracts, but also to review working practices for contractors to ensure that everything is as it should be before April 2021. You’ll find plenty of contract templates online, which will help on both fronts.
When it comes to complying with IR35 rules, there is plenty that many hiring companies and agencies will need to do before April 2021 – and ensuring that contracts are IR35-compliant is a vital piece of the puzzle. With the right contracts in place – and with working practices reviewed in line with these contracts – you can be assured that both you and your contractors are compliant with the new rules.
