Understanding your contract – what to look out for

So, you’ve decided that you want to become a contractor. Your next step will be to decide how you are going to operate as a contractor. Two of the options available is through a limited company or via an umbrella company.

Working through your own limited company continues to be the most tax efficient route for most. It’s also important to mention that most contracts are offered through recruitment agencies. Most agencies prefer contractors to work through a limited company, so this is another reason to consider setting one up.

After you’ve accepted an offer, agreed on a rate and a start date, you’ll need to sign an independent contractor agreement.

This article looks at what limited company contractors should be aware of regarding contractor agreements.

Understand who the contract is between

If you are working with the client directly, the contract is between your invoicing company (your limited company) and the client. If you are working with an organisation via a recruitment agency, the contract will be between your invoicing company and the recruitment agency.

What is the IR35 standing of the contract?

The most important consideration for you as a contractor at this stage is whether the contract will place you inside or outside of IR35. If you are not aware of IR35, our article ‘IR35 advice for contractors’ covers the specifics of this legislation in detail.

For the contract to be deemed to be outside of IR35, the terms used must show that the engagement does not constitute employment.

Key points to consider are:

Nature of work and schedules

The contract should accurately describe the nature of the work and describe it as a project or projects.

Right of control

The contract should show that you as a contractor are not under the direction, control or supervision of the client. As a contractor, you must be able to show that you have control over the method and manner of your work.

Mutuality of Obligation 

The contract needs to avoid stating that there is an ongoing obligation to provide work. It is recommended that further work is set out under a separate contract. Additionally, the contract should not give the client or agency the opportunity to extend the contract without your consent.

Substitution

Plays an important role in determining if a contract is inside or outside of IR35. Substitution is the right for a contractor to supply a replacement contractor if they are unwilling or unable to carry out the service under the contract.

Top tip: Read every detail carefully

As a self-employed contractor, it is vital that you reduce your commercial risk. Carefully reviewing every aspect of the contract will help you to reduce any risk. You need to pay special attention to the rights, obligations and restrictions outlined in the agreement. This includes checking how far these extend and how they will be enforced.

If you any concerns regarding the contract, the first step is to contact the organisation who the contract is with i.e. the client or the recruitment agency. If further clarification is needed, you should contact a contract law expert.

We offer a range of accountancy packages, some of which include unlimited IR35 reviews. Our packages are perfect for contractors at every stage of their contracting career. Give us a call on 01962 867550 and we’ll be delighted to talk through our range of fully inclusive accountancy packages.