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Introduction to this document

Contract for services

HMRC’s aim is to reclassify freelancers such as consultants as employees and insist that PAYE and NI is due on the total amount paid to them. Having a realistic contract for services in place will provide evidence that the engagement is one of self-employment.

Contracts for services

Contracts for services need to be distinguished from contracts of service (i.e. of employment). Under a Contract for Services you can only order what is to be done, while in the case of an employee under a contract of service, not only can you say what is to be done, but also how it is to be done. One important element in a contract for services is a substitution clause. This allows the contractor to send in another suitably qualified worker in their place. Four points should be borne in mind when setting up a contract with a self-employed independent contractor:

 the right of substitution should not be limited to situations where the named worker is unable to work

 you should not be given the right to veto substitutes unless they are not suitably qualified

 you should not be able to arrange for the substitute

 the payment to the substitute must be the responsibility of the contractor and not your company.

A realistic contract

Have a realistic contract between you and any freelancers you use. Ensure that your contract with them: (1) does not include phrases that give the impression that they are under the company’s control; (2) gives no certainty of continuing work (this means that HMRC cannot contend what is termed “mutuality of obligation”); (3) includes a substitution clause; and (4) does not give them any employee rights such as holiday or sick pay, pension rights etc. Make sure that reality matches contract; for example, check that they are not listed in the internal telephone list of employees, and don’t have the right to attend staff events (other than as an invited guest). They might even have a different security pass compared to employees.