What is a Contract for Services in IR35 – Meaning / Definition

The main IR35 factors affecting contractors
The main IR35 factors affecting contractors

Contract for Services

So, what is a Contract for Services?

A contract for services describes the relationship of contractors with their client company and in their working practices. It is very different from a contract of service which an employee has with his or her employer. A proper contract for services takes contractors outside IR35. The relationship is one of supplier / customer rather than one of employer / employee. This relationship is defined in the contractor’s contract with the client company.

1. Supervision, Direction and Control

A contractor with a contract for services will have a fair amount of autonomy on how he or she does the task. Employees on a contract of service will be told how to do tasks by their supervisor. Contractors will work out what needs to be done and how to do it and agree that jointly with their client company.

2. Mutuality of Obligation

An employee on a contract of service will be paid automatically every month by his or her employer company. The employee, in return, must do whatever tasks the company needs them to do. A contractor on a contract for services does not have this automatic means of being paid. His contract relates to a task, or series of tasks, and when that task is complete there is no obligation to continue to pay him or her. There is no obligation to pay the contractor if he or she does not turn up or if there is nothing for them to do for whatever reason for a few days.

3. Right of Substitution

A contractor has a right, enshrined in his or her contract for services, to name a substitute who will do his or her work, if, for some reason, the contractor cannot do it. an employee cannot do this.

A court has ruled that the onus is on HMRC to prove that a substitute would never be used. So, this is a good one for contractors.

4. Length of Engagement

Length of engagement is the amount of time a contractor has spent at a single company supplying services to a single client. It used to be thought that this was a major factor pointing to IR35. It used to be said that if you were more than two years at a single company then HMRC would consider that you were a disguised employee and inside IR35. They may well have thought so but court decisions have not proved this. If you are on short contracts at a company which get renewed every three months or so there is no reason to believe that you suddenly become inside IR35 after two years.

This is no different to a goods supplier supplying the same customer for more than two years. So, why should it be different for suppliers of services?

5. Financial Risk

Financial Risk is whether contractors incur any risks to their income whilst on a contract for services at a company. HMRC argued that as they get paid the same amount every day there is no financial risk to them.

However, an IR35 tribunal judge rejected that. She said that contractors run the risk if not getting paid if they become sick or the project is cancelled. In those circumstances a permanent employee would still get paid whereas a contractor would not. So there is a financial risk to the contractor.

6. Right of Dismissal

Employees on a contract of service can get dismissed with a notice period. The contract for services of a contractor would normally only get terminated if the contractor did not fulfill conditions in the contract. So it is best that a contractor does not have a notice period in the contract.

7. Basis of Payment

Basis of Payment refers to how a freelancer gets paid and for what. An employee gets paid every month more or less the same amount. It is not even dependent on his or her presence or on completion of tasks.

A freelancer, via his or her contract for services would only get paid if they turn up to do the tasks and would only get paid if the tasks get done. So, it would be better if contractors did some fixed price work or had to make corrections free of charge. They could make sure that during the contract they have at least one unpaid day off.

8. Part and Parcel of the Organisation

Freelancers should make sure that they are Part and Parcel of the Organisation as little as possible. They should:-

  1. Not be on he company hierarchy chart
  2. If they have to wear a badge it should say Contractor on it
  3. It would be better not to join the Sports Club
  4. Not join after hours activities at the company like the Christmas Party
  5. Not eat in the staff canteen

It is crucial that contractors differentiate themselves from employees as much as possible.

9. Provision of Equipment

Freelancers should use their own equipment as much as possible. They should use their own PC, at least some of the time, if they can. They should stay well away from the company stationery cupboard too.

10. Employee Benefits

Freelancers should avoid all Employee Benefits. They already don’t get sick pay, holiday pay, maternity leave, pension contributions, share options etc. They should also avoid taking free advantage of the Sports Club and if they do attend any company events like the Christmas party they should pay for it – unlike employees.

11. The Opportunity to Benefit from Sound Management

HMRC argues that, as the contractor gets paid a daily rate, there is no opportunity for them to benefit from sound management of the finances. Most businesses would profit more by cutting costs and generating greater profits. So, it would be beneficial to contractors if they could so some work that is fixed price. If they finished it quicker than estimated they would make more profit. However, it could be argued that getting a contract renewal is benefiting from sound management.

12. The Intention of the Parties

An important feature of a contract for services is the original intention of the parties. Did they intend it to be a contract for services or a contract of service? Did the company see the contractor as a supplier or as a temporary employee? Usually this is a good one for contractors as the company would normally agree that the intention was a contract for services.

Contractors Should Differentiate Themselves from Employees

In the end, the most important thing for contractor is to differentiate their way of working as much as possible from that of an employee. That should keep them well outside IR35.

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