Understanding the three key IR35 status tests
The best place to start to make sure you’re outside IR35 is with an IR35 Status Contract Review, but what does that entail exactly? A contract review looks at your written client agreement clause by clause and applies it to the three key IR35 status test: Substitution, Control, and Mutuality of Obligation (MOO).
Read on for positive, outside-IR35 examples of clauses for each of the three tests, as well as pointers for what to avoid in your contract.
Do note that whilst very important, the aforementioned clauses are not the be-all and end-all of an IR35 contract review – they’re simply the largest indicators towards status. If you have any doubt as to the status of your contract, we would encourage you to get the written terms checked by an expert.
Example outside-IR35 clause wordings
The Contractor shall have the right to provide the services using Representatives of their own choosing. The Contractor can substitute any Representative provided that the Client is reasonably satisfied that the substitute Representative is sufficiently skilled, experienced and qualified to carry out the services. The Contractor will remain liable for the Services completed by any substitute and will bear any costs.
The Supplier shall have complete discretion concerning which of its personnel perform the services and may provide a substitute whenever necessary. The Supplier warrants that such personnel will be adequately skilled and qualified. The Supplier shall bear any costs involved in providing a substitute.
Should the individual assigned to provide the services be unable to do so for any reason, the Supplier shall be able to provide a substitute, so long as such personnel are adequately experienced, skilled and qualified, and shall remain responsible for any costs associated in providing a substitute. The client has the right to refuse to accept a substitute, if in its reasonable opinion such individual is not suitable, due to lack of skills experience and qualifications.
Why are these clause examples outside IR35?
The key thing to note with substitution clauses is that the right to supply a substitute must be unfettered – that is to say it should not be unduly restricted.
If your clause states that you can substitute, but you need to seek approval, or consent in order to do so then this will be considered restrictive, as it essentially places the control over the right squarely in the client’s hands.
Similarly, if the client is able to refuse a substitute for any reason they choose, or “entirely at their discretion” this will effectively nullify the clause. A substitute can be refused, but they should only be able to be refused on reasonable grounds relating to a lack of skills, experience, knowledge or experience.
Another commonly missed aspect of a substitution clause would be financial liability for the substitute. For substitution to be genuine, it is crucial that your limited company remain responsible for paying a substitute. If you do not, HMRC will argue that it is in fact assigning (or at a push, subcontracting) and not true substitution.
What should I avoid in a contract to stay outside IR35?
The Client shall not have the right, nor shall it seek to exercise direction, control or supervision over the Contractor. The Contractor shall co-operate with any reasonable request of the client within the scope of the services, but it is acknowledged that the Contractor will be able to determine how best the services are provided and will have autonomy over their working methods.
The Supplier may at any time and without giving the client prior notification, make any changes to the specified service which are necessary to comply with any applicable safety or other statutory requirements, or make any changes to the specified service which do not materially affect the nature or quality of the specified service.
For control the important bit to note is that the client should not be able to tell you how to do the work, they should simply be providing the overarching requirements and leaving it to your skill and expertise to get the job done. Anything that helps to indicate this will work in your favour for IR35.
It is reasonable for the client to provide guidance on what they need doing, but anything that implies they are micromanaging you, or that you are integrated more than an arm’s length resource should be, will be taken as indicators towards employment.
Example outside-IR35 clause wording
The Client is under no obligation to offer further contracts or services to the Contractor nor is the Contractor under any obligation to accept any contract or services offered. For the avoidance of doubt, both the Contractor and the Client agree and intend that this agreement does not create any mutuality of obligation, either during or following the agreement.
Why is this clause example outside IR35?
Whilst there’s not really much by way of wording that can be suggested for mutuality of obligation, the important thing is that there should be absolutely no expectation that work will be offered by the client, and that any offers that are made by the client (or agency) would be accepted.
The above clause makes this very clear, but it is key to note that this does not mean you cannot accept an extended contract, it should just not be a given that you will – ensure that an offer is made and that if you accept said offer and there is proof of this where possible (an email chain would suffice!)