Mutuality of Obligation and the Contractor
The three main factors that HMRC uses to determine if a contractor is inside IR35 or not are the Right of Substitution, Control and Mutuality of Obligation.
We will look, here, at Mutaulity of Obligation.
This is, in simple terms:-
- the obligation for an employer to provide work for an employee to do,
- an obligation for the employee to do the work and
- the obligation for the employer to pay the employee.
This is a contract of service and only ends with the worker’s termination or he hands in notice and leaves the company.
Contract for Services
In contrast to that, the contractor, or freelancer, has a contract for services.
There should be no compunction for an employer to pay a freelancer if he or she doesn’t do the work. In other works a contract for services payment agreement should be for services or product delivery rather than for time spent working for a customer company.
It is all about differentiating the way you operate from the modus operandi of a permanent employee.
To help contractors operate differently from permanent employees, in order to stay outside of IR35 under mutuality of obligation, we have put togther some dos and don’ts for the contractor.
Dos and Don’ts for Mutuality of Obligation
1. It should be in the contract that the client doesn’t have any obligation to provide work for the contractor and the contractor has no obligation to do work for the client.
2. It should be in he contract that the contractor is should do a particular piece of work. A set time period should not be specified. It should say that the contractor is going to help deliver an IT Project or Phase I of a Project rather than saying that he, or she, is there for six months.
As contractors normally work on projects and clients can get rid of them at any time this should not be too hard to agree.
3. If a contractor is going to get a renewal then it should be for another piece of work. For example, if he, or she, is hired to help deliver Phase I of a Project then they can get a renewal to deliver Phase II of a Project.
4. There should be no rolling contract or HMRC could see that as becoming a contract of service.
5. The contract would be best not to have a notice period in it. Notice periods are for employees. Also, the end of a contract should relate to a particular piece of work you deliver.
6. Once the task, or group of tasks, is complete the contract should state that there is no obligation for the client to continue to pay the contractor for a set period. For example, if the tasks or project phase are finshed early.
Projects Don’t End Early
As we know, this happens about once in a blue moon. So contractors are safe here. Projects are far more likely to be late. So it is better, anyway, to link a contractor’s contract with the client to a piece of work or Project.
It doesn’t necessarily mean that you are caught by IR35 if there is mutuality of obligation between the client and the contractor.
This is just one of the factors that point towards being inside of IR35 or outside.
However, you are best to differentiate yourself as much as possible in your working practices from employees.
If you can get the above clauses into your contract, and agreed by the client, so much the better.