The IR35 legislation was introduced to address tax avoidance among individuals working through intermediaries, such as personal service companies, who would otherwise be considered employees if directly engaged. For consultants in the UK, understanding IR35 is crucial, as it directly affects tax obligations, take-home pay, and legal compliance. One of the most critical aspects in determining IR35 status is the contract itself. Contracts serve as the foundation for assessing whether a consultant is genuinely self-employed or should be treated as an employee for tax purposes.

Consultants often work across multiple sectors, including IT, engineering, finance, and management consulting. Each sector has its own nuances, but the principles of IR35 compliance remain consistent. Misinterpreting contract terms or failing to structure agreements correctly can result in unexpected tax liabilities, HMRC investigations, or even penalties. This is why many consultants choose to seek guidance from specialist payroll and compliance providers like The Infinity Group to ensure their contracts and working practices align with IR35 requirements.

Understanding IR35 and Its Relevance to Consultants

IR35, also known as off-payroll working rules, applies when a consultant IR35 works through a limited company or intermediary but would be considered an employee if directly engaged by the client. HMRC uses two main factors to determine whether IR35 applies: the contract terms and the actual working practices. While both elements are important, the contract plays a significant role as it legally defines the relationship between the consultant and the client.

Being inside IR35 means the consultant must pay income tax and National Insurance contributions as if they were an employee, even though they operate through a company. Being outside IR35 allows for more flexible taxation, potentially resulting in higher take-home pay. Understanding how contracts influence IR35 status is therefore essential for consultants to plan their finances and avoid compliance issues.

The Importance of Written Contracts

A written contract is the primary tool HMRC uses to assess employment status. It outlines the responsibilities, obligations, and rights of both the consultant and the client. A well-structured contract can clearly demonstrate whether a consultant operates independently or under employment-like conditions. Important elements include:

• Scope of work: specifying the tasks and responsibilities rather than controlling the method of work
• Mutuality of obligation: clarifying that the client is not obliged to provide continuous work and the consultant is free to accept or decline assignments
• Substitution clauses: allowing the consultant to send a substitute if they cannot perform the work personally
• Termination rights: outlining notice periods and conditions for ending the contract
• Payment terms: linking payment to deliverables rather than time spent

A contract that properly addresses these points can strengthen the consultant’s position as being outside IR35.

Key Contractual Elements That Affect IR35 Status

Scope and Control

Control is a central factor in determining employment status. A contract should specify that the consultant has autonomy over how, when, and where the work is carried out. If a client imposes strict instructions, dictates working hours, or requires physical presence, this may indicate employment. Conversely, clauses that highlight independence and discretion can support a position outside IR35.

Substitution Clauses

The ability to send a substitute is one of the most influential indicators in HMRC assessments. A genuine substitution clause shows that the consultant is engaged to deliver a result rather than provide personal services. The clause should allow the consultant to send another suitably qualified individual to complete the work, with the client’s approval but without undue restrictions. A strong substitution clause is a key feature in demonstrating self-employment status.

Mutuality of Obligation

Mutuality of obligation refers to the expectation that the client must provide ongoing work and the consultant must accept it. Contracts that clearly state the consultant is engaged for specific projects or deliverables, without guaranteeing further work, help establish independence. Contracts that imply continuous work or automatic renewal may suggest an employment relationship, putting the consultant inside IR35.

Payment Terms

How a consultant is paid also affects IR35 status. Contracts linking payment to deliverables or project milestones rather than fixed hours support an outside IR35 classification. Payment structures that mimic a salary, such as weekly payments for attending at specified times, may indicate employment. Transparent and outcome-based payment terms are therefore critical in contract design.

Termination Clauses

The manner in which a contract can be terminated is another indicator. Employment-like contracts often contain strict notice periods and conditions that restrict the consultant’s flexibility. Contracts that allow either party to terminate with reasonable notice and without excessive penalties demonstrate that the consultant is engaged as an independent professional.

How Working Practices Complement Contract Terms

While contracts are central, HMRC also considers actual working practices. Even a well-written contract may be disregarded if day-to-day arrangements suggest employment. For example, if a consultant is required to attend daily meetings, work exclusively for one client, or follow client policies rigidly, these practices may contradict the contract’s provisions. Therefore, consultants should ensure that their working practices reflect the contractual terms.

Providers such as The Infinity Group offer guidance on aligning working practices with contract terms, helping consultants minimise risk and maintain compliance. This dual approach ensures that both documentation and behaviour support an outside IR35 status.

The Role of IR35 Reviews and Status Determination

Many clients now perform IR35 assessments before engaging consultants. Status determination statements (SDS) are issued to clarify whether the engagement falls inside or outside IR35. For medium and large companies, responsibility for determining IR35 status shifted to the client under reforms introduced in recent years. Accurate contracts make it easier for clients to assess status confidently and reduce the likelihood of disputes with HMRC.

Consultants can also request professional reviews of their contracts to ensure IR35 compliance. Independent assessments from payroll and compliance specialists, such as The Infinity Group, provide an added layer of security. These reviews examine contract clauses, payment structures, substitution rights, and working practices to provide guidance on potential IR35 risks.

Common Contract Pitfalls to Avoid

Several common mistakes in contract drafting can inadvertently place consultants inside IR35, including:

• Overly restrictive substitution clauses or the absence of substitution rights
• Vague project scope or ambiguous deliverables
• Continuous work expectations implying mutuality of obligation
• Payment linked to time or attendance rather than results
• Contracts that mimic employment agreements with benefits, holidays, or workplace rules

Being aware of these pitfalls allows consultants to renegotiate terms or seek professional advice before signing.

Why Consultants Seek Expert Support

Navigating IR35 can be complex, especially given the financial implications and HMRC scrutiny. Many consultants turn to specialist providers such as The Infinity Group for assistance. These providers offer:

• Contract reviews and amendments for IR35 compliance
• Advice on working practices aligned with contractual terms
• Payroll management services to ensure accurate tax deductions
• Support in case of HMRC investigations or disputes

By leveraging expert guidance, consultants reduce risk, protect income, and gain confidence that their engagements comply with legislation.

Conclusion

Contracts play a pivotal role in determining a consultant’s IR35 status in the UK. The way a contract is structured—covering scope, control, substitution, payment terms, and termination clauses—can significantly influence HMRC assessments. However, contracts alone are not sufficient; working practices must align with the terms to maintain compliance.

For consultants, understanding and properly drafting contracts is essential for financial planning, legal compliance, and avoiding unexpected tax liabilities. Partnering with experienced payroll and compliance providers like The Infinity Group can offer the necessary expertise, ensuring contracts and practices support an outside IR35 status. By taking a proactive approach to contract management and compliance, consultants can work confidently and securely in the evolving UK contracting landscape.