10 things to consider when signing a consultancy contract
When running any kind of business, the owner needs to be aware of any commercial risk to the business to allow them to reduce and minimise it. To understand the risk, businesses need to be aware of all the commerical terms in the contracts that the business gets into. These will vary for each contract that they sign, however it's important to fully understand all the terms and conditions in the contracts. In this guide to signing a consultancy contract, we look at the key points businesses need to look at before getting into any contracts.
A business will have contracts for all aspect of the business, from contracts with your clients to those with agencies and suppliers. A contract will usually highlight your rights, restrictions and obligations and its important to make sure you understand them and be aware of them. This requires checking the extent and enforceability of liability, indemnity and restriction provisions and determining which terms are absolute obligations, which terms require the business to use its reasonable endeavours and which terms require using best endeavours. In order to minimise the liabilities for your freelance business, a contract will have important legal distinctions and you need to be aware of them.
There are some other things to taking into consideration that is the difference between getting into a contract with a client to 'supply a worker' to perform services and getting into a contract to actually provide those services yourself. There will be different liabilities that will from different types of contract. So, it is possible that there will be arguments that your limited company is acting akin to an agency when 'providing personnel' and consequently subject to unexpected regulations and tax legislation.
Regarding IR35, a contract needs to portray the relationship between two entities, and it should highlight the terms of engagement which would be invariably unique. To avoid IR35 and make sure that you remain outside of it, the contracts need to reflect a relationship that not be seen as an employee/employer relationship under the established case law.
For the layperson, this is often a difficult distinction to make. It's always a good idea to seek help and advice from a professional if you are unsure. A specialist like Lawspeed can help and advise you on your current situation. Find out the 10 things to consider when signing a consultancy contract below.
1. What is the nature of work schedules?
When it comes to the nature of work schedules, they need to be accurately reflected in the contract for IR35 purposes. It also needs to be made clear if the work is a project or number of projects or have some form of deliverable that is consistent with a discrete piece of work that is not ongoing. It's also vital to ensure that the description of the working nature and schedule of the individual are accurately reflected in the contract. This is incredibly important as they will be the terms in which you must hold up on your end and deliver and provide the services listed.
2. What is the right of control?
Old style standard agency contracts usually contain a clause requiring the contractor to be under the direction, supervision and control of the client. These clauses are to be avoided as they can get the contractor to be inside IR35. The way a contractor carries out the work and how they decide to do it should be left to them.
3. Is there room for substitution?
The substitution clause has received much publicity as the panacea to cure all IR35 ills. Whilst this approach is simplistic it is an important clause to look out for in a contract. The right need not be unfettered (not many clients will agree to an unfettered right) but must be valid. If substitution has not actually taken place then you should be cautious relying on it to avoid being caught inside IR35. The relevant clause must be a genuine right to substitute and many clauses we have seen fall well short of what is required.
4. Is there a mutuality of obligation?
In your contract, it's best if there is no mention of an explicit or implicit clause for an ongoing obligation to provide work. If you are to carry out further work for a client then this would require a new contract. It's essential for you to do this and make sure that no contracts are extended without you being notified by the client or andy agencies.
5. What is the clause on termination?
As a general rule for contracts that will stand against IR35 will feature a specific project that will come to an end upon completion. So, it would be in your best interest to list the work as a project with a timeframe and a duration which will clearly state that the project will end once it has been completed.
6. What is the financial risk?
If you want to run a business that intends to stay outside of the IR35, then there needs to be a level of financial risk. There are a number of way of showing that your business has financial risk and this involving incorporating indemnity provisions, fixing any work that a client might have a complaint about or maintaining professional indemnity insurance.
7. What are the payment terms?
The payment terms in a contract are also incredibly important, as they will help separate the payments to an employee and payments another commercial business. Therefore, payment should always be contingent on invoices being issued. Although fixed-price projects are preferable when it comes to taking on new clients and project, there are a great number of sole traders and professionals that charge an hourly or daily rate without compromising their self-employment status. So, if this the way you have chosen to set your prices then that is perfectly acceptable.
8. Is there an exclusivity clause?
If you are an independent contractor or a freelancer there should be no exclusivity clause as this can land you inside the IR35. If your client restricts you from working with other clients, then there is a great risk of being inside IR35, should the HMRC look into your status.
9. What premises will be used during the service?
There are a number of things that HMRC would look at if they were trying to determine your status. One of those things is the equipment you use and the premises you work on. You need to make sure the contract reflects accurately where the work will take place and if the individual carries out some work on their own premises, then the contract needs to reflect that not all work is carried out on the client's site.
10. What are the intentions of the relationship?
The contract should feature a clause which states the intention of the relationship is not to be one of an employer and employee, rather the parties involved are independent. There to support the claims you are making, with stating the parties are independent the contract should not have clauses that are typical of an employment contract. This includes procedures for notification of absence, references to misconduct or overtime.
Under IR35 it is all the circumstances of the arrangements, including the working practices that are relevant. If you are having to prove your status as self-employed, then the strongest evidence you are going to have will be your contract with the client. Therefore, the contract needs to be accurate and needs to reflect the actual relationship between you and the client. Something to consider is that the law is always changing, therefore professional legal skills may be needed to ensure that the contract is an actual relfection of your working practices. Its recommended you seek the legal help of a professional to review, draft and negotiate contracts for you to avoid getting caught inside IR25. Using a IR35 speclaist will help you mitigate the risks that the self-employed face.
The expert for this piece is James May form Lawspeed.
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