- Thursday, 30 August 2012 15:04
- Written by Troy Stevens
Contract reviews are a task that all contractors require, and more often than not are failed over very simple or easily avoided factors. With the help of highly experienced professionals, we have compiled the top 5 most common contract slip ups, so if ever you have failed a contract assessment or are in need of contract and IR35 advice, then take a look at this helpful insight.
1. Substitution Clause
“It is imperative that a strong substitution clause is present within a contract as not only is it one of the most important tests in determining IR35 status, but it is one of the most common causes of failing a contract review.”
2. Payments in lieu of service
“Contractors should not receive payment for any time during which services are not supplied. Payment for any time where services are not provided would be seen by HMRC as indicative of employment.”
3. Individual being party to the agreement
“For the contract to be compliant with regards to IR35, it should be a business to business agreement between two limited companies; not an individual. Therefore references to the individual should be avoided within a contract.”
4. Lack of control
“The Client should have no right to, nor shall seek to, exercise any direction, control, or supervision over the Supplier in the provision of the services. The Supplier shall endeavour to co-operate with the Client’s reasonable requests within the scope of the services, however it is acknowledged that the Supplier shall have autonomy over their working methods.”
5. No termination
“Notice periods can be viewed by HMRC as an indication that a mutuality of obligation exists. A better indication of genuine self-employment would be not to have any notice periods at all and both parties should terminate the agreement immediately and without notice. However in the commercial world this would be impractical and reasonable notice periods are considered defendable for IR35 purposes. Although a lack of mutuality of obligation is a pointer towards a contract for services, this issue does not carry as much weight as it used to and in the case of McManus v Griffiths, Mr Justice Lightman said in relation to a three-month notice period in that case "I do not think it is indicative of either. I regard the provision as neutral."
These 5 areas of contract reviews are the most common slip ups made in contracts regarding IR35. With HMRC ever tightening their grip on contractors and freelancers, incorrect contract reviews are hurdles that affect limited company professionals far more often than they should.