Is an IR35 contract template worth the paper it’s written on?

Finding an IR35 contract template online is easy. There are dozens of them available.

But in this article, we share with you why IR35 contract templates are as useless as verbal contracts if HMRC comes after you.

We’re CoComply, a professional advice and IR35 consultancy service. We specialise in creating bespoke IR35 contracts for each of your off-payroll workers and making sure that compliance is maintained throughout your entire engagement.

For more information on IR35 compliance for employers, please call +44 (0) 203 051 9792, email [email protected] or fill out the form below.

If you’re here, you want your contractors outside IR35

That’s good. It’s the right thing to do.

What many people miss about the shifting of IR35 determination responsibility from contractors to clients miss is that, in virtually every other respect, IR35 is unchanged.

The purpose of IR35 is to determine employment status according to HMRC’s definition.

IR35 guidelines dictate whether a limited company contractor you have hired is either a:

Genuine independent business owner or
Disguised employee

Contactors got good at IR35…

So why did things change? The problem was that limited company contractors had got very good at handling this complicated element of employment law.

Before starting an assignment, a contractor made sure that their written contract and their working arrangements kept them outside IR35.

There were two incentives to do this:

The costs involved in being inside IR35 are much higher than being outside IR35
The financial risk lay with them – if they got it wrong, the penalties could be enormous

…so HMRC wanted to go after employers instead

For the best part of a decade, HMRC chased thousands of off-payroll workers convinced they weren’t working under valid contracts and that their working practices were that of employees. It took a lot of time, money and effort to chase these individual contractors.

Embarrassingly, HMRC lost a high proportion of the cases they took to the First Tier Tribunal (the court that hears IR35 appeals).

It made more sense to HMRC to concentrate their limited resources on chasing employers instead. So, if a company had a contingent workforce of 50, there may be 50 opportunities to collect taxes and fines from the employer.

What happened when employers became responsible for IR35 status determination?

Hiring, procurement and financial directors and managers aren’t as familiar with IR35 laws as contractors (no offence).

Although they were under pressure from contractors to keep them outside IR35, greater pressure came from other directors and board-level staff to blanket determine all contractors as inside IR35. The financial risk of getting status determinations wrong en masse was too high.

In the months following the shifting of responsibility from the public sector (in 2017) and medium-to-large businesses (in 2021), there was a significant jump in the number of employees registered on payrolls.

From HMRC’s perspective, the approach had worked so far. Contractors’ traditional workplace, their clients, have essentially become hostile environments to many contractors wanting to work outside IR35.

What can be done about it?

For the people in your company tasked with procuring the services of contractors if they do not have specialist IR35 knowledge, we recommend the following 5 steps if you want do it by yourself.

1. Plan how you engage with contractors

As the end client, it’s your responsibility to give your contractors as much freedom as possible to carry out their roles and to treat them like independent businesses. Are the working practices your contractors operate under truly outside IR35? Can they really be shown to be in a position of true self-employment?

IR35 compliance is a journey that begins before you start headhunting a suitable expert for the role your have in mind stretching right through til the time the contract ends.

Whether you use recruitment agencies or hire directly, you’re likely to get more and better responses to your opening if you advertise it as being specifically outside IR35.

2. Three key employment tests

There are multiple factors which determine IR35 status but arguably the three most important are:

Level of control. As the end client, you should exercise as little control as possible over your contractor’s working methods as possible. Contractors should be able to work in a way of their own choosing.
Substitution clauses. You should not require your contractor to provide a personal service to get the work done. You should include a standard substitution clause that allows your contractor to send someone in his or her place to provide service.
Mutuality of obligation. You should be under no obligation to provide additional work or further contracts to an off-payroll worker nor should they feel any obligation to accept a new contract from you.

You also need to include in your working agreement:

Financial risk. Contractors remain responsible for their mistakes and they remain liable for all costs incurred in putting right errors. Contractors should have their own business insurance.
Right to exit. You should not use an onerous termination clause in your contract to force your contractor to stay. They should either be able to walk away or give 30 days’ notice that they intend to exit a contract.
Exclusivity. It’s worth noting that barring a contractor working for clients is a key signal to HMRC that a contractor is a disguised employee.
Payment terms and invoicing. You should have a standard client-supplier invoicing arrangement with your contractor. Your contractor’s invoice should specify the hours worked and tasks performed if possible. Please note that IR35 status can be complicated further if a recruitment agency makes payment to your contractors.

3. Get your written contract right

Each of the main employment tests should be thoroughly described in the written contract you have with your off-payroll workers.

You should not use model contracts or IR35 contract templates that you have downloaded from the internet or that have been supplied to you by a recruitment agency. You should consider each working arrangement on its own merits too and not use blanket assessments or role-based assessments.

4. Make sure you inform all stakeholders

End clients must give prior notification of your IR35 assessment to their contractor and to anyone else involved in the supply chain, like a recruitment agency.

5. Make sure working practices match your IR35 contract

Throughout your engagement with each contractor, your IR35 contract should reflect the true circumstances under which your contractor works. If you are investigated, HMRC will want to see proof that there is no disparity between the two.

Take back control of IR35 to improve contractor relations

For a public sector body or private sector company, the fright your competitors have taken to the revised off-payroll rules is your opportunity to attract some of Britain’s best and most skilled contractors to work for your firm.

In addition, you could save £160,000 a year or more by working with us if you have an average of 10 contractors engaged at any one time earning an average of £100,000 a year.

To speak with a CoComply IR35 specialist in confidence and to explore options for making your workplace contractor-friendly, please get in touch with us today.