The three key requirements in a contract that will fall outside IR35 are:
What is mutuality of obligations?
If you are an employee your employer is obliged to find work for you; even if there is a power cut you may be asked to do some filing or administration work that you wouldn’t normally be asked to do. If you are a contractor the client will not be obliged to find you work. As you are paid to work on a specific task unless you can use your skills you will probably be sent home (unpaid).
The key questions are:
- Do you have to complete the contract?
- What happens if you walk out, can the client just sue for breach of contract or is there an obligation to perform?
- Is the client obliged to offer work?
- Can the client pull the plug on the contract? And do you have any rights other than breach of contract?
- Does the contract stop you working for other businesses?
- What is the notice period?
Example clauses, do they pass or fail?
Example 1
At any time the Agency may change the number of hours or days the services are provided for, including reducing the hours to zero. In the event the hours are reduced to zero the Contractor may terminate the contract.
FAIL – the only time the Contractor can terminate a contract is if there are no hours to work. Therefore the Contractor has an obligation to perform the contract.
Example 2
The Agency is under no obligation to offer future contracts to the Contractor and if it does make such offer the Contractor is not obliged to accept it.
FAIL – the mutuality of obligation is determined within the contract. It is not relevant that contracts may or may not be offered again.
Example 3
The Client may terminate this agreement forthwith if the Contractor fails to provide a reasonable quality of service; or, in the opinion of the Client, it is no longer appropriate for the agreement to remain in force.
FAIL – although the Client can terminate at will we need to ensure that the Contractor can do likewise.
Example 4
The Client is not obliged to offer contracts to the Contractor nor is the Contractor obliged to accept such contracts. The Contractor is not obliged to make its service available.
PASS – there is no requirement for the Contractor to undertake the work.
Notice periods
Under a contract of employment notice periods tend to be longer the more senior the position with three months being common. If you are providing a service you would not expect a long notice period. If your notice period is a week that should be fine but a one month notice period on a six month contract would not be okay and would indicate “mutuality of obligations”.
If you would like help understanding whether your contract falls within the IR35 legislation then contact Clearways Accountants using the contact form below. We offer an IR35 contract review service to all our clients at a fixed fee.