Getting all the details in black and white is crucial. We share our top tips for writing an HMRC compliant freelance agreement (contract for services) and explain why they are so important.
Why is a contract important as a freelancer?
Regardless of the type of self-employed tasks or projects being delivered, setting out the agreement in a contract for services provides clarity of understanding as well as legal protection for both parties. A freelancing contract, in the form of a contract for services or consultancy agreement, should include the details and expectations of both parties that have been discussed and agreed.
Covering all your bases before signing on the dotted line helps you to get paid on time, manage your client’s expectations, and stay on top of IR35 compliance.
Tax status
As far as HMRC are concerned, you are either an employee or self-employed (worker status is an employment term, not a tax status).
Contractor, Associate or Freelancer are common titles used for self-employed individuals, generally understood to mean a self-employed person who is not an employee or worker of the company that engages them and who is responsible for their own taxation on a self-employed basis.
A freelancer typically has multiple clients and projects on the go at any one time and determines their own freelance rates, days, and hours of work, how the work will be approached, and often getting paid based on output rather than hours or days worked.
Self-employed freelancers do not have employment rights in the same way that PAYE employees or workers do, such as sick pay, paid annual leave or the right to claim unfair dismissal. Any dispute relating to the status of a freelancer will review the reality of the working practices rather than relying simply on what is written in a contract.
The right of substitution is a key test in determining the tax status of individuals engaged by an organisation, stating the freelancer’s right to send a substitute in their place if they are unable to carry out the agreed work. While having a right of substitution clause in a contract does not guarantee that you would be considered outside IR35, such a clause is an important factor that can help to prove your self-employed status.
If correctly worded to indicate the freelancer’s degree of control over the work and who does it, the clause can be particularly effective in demonstrating that the freelancer is replaceable, and therefore isn’t providing a personal service, a key factor in HMRC identifying disguised employees.
To assist with determining tax status, the Government have developed the ‘CEST’ tool (Check Employment Status for Tax) that provides a status determination decision on whether an individual would be considered self-employed or employed. Check employment status for tax - GOV.UK (www.gov.uk).
Staying IR35 compliant
The freelance contract needs to specify that your relationship with the client is on a self-employed basis so there is no confusion over whether you are employed, or self-employed in the eyes of HMRC. Where an individual work through their own limited company, IR35 may need to be considered, namely whether the arrangement between your limited company and your client genuinely reflects a self-employed relationship (considered to be outside IR35).
Where your end client is in the public sector or a medium or large-sized business in the private sector, they will be responsible for determining the status of your engagement. However, where you are engaged by a small organisation, (as defined by the Companies Act), the freelancer has the responsibility and liability to determine the IR35 status, making it even more important that the contractual terms correctly reflect the status of the engagement.
Getting paid as a freelancer
Whether charging a day rate or by the hour, how and when a freelancer is to be paid is important to set out clearly in the contract.
Similarly, a contract should be clear about expenses and costs, setting out exactly what will be reimbursable by the client, and what will be included in the rate quoted.
Freelancers can be paid against project milestones, on completion or at regular intervals such as monthly invoicing. For larger projects, or ones with upfront creation required, an upfront fee is not uncommon and should be clearly specified. Whichever payment schedule is chosen, the contract should make clear the payment terms i.e. payment should be made within 30 days of receipt of invoice. Including overdue payment fees can help your case if a dispute arises or you need to chase debts.
Who owns the work produced?
Setting out your intellectual property rights in your contract will enable both parties to be clear about who has the rights to the work produced. A non-payment clause specifying that until payment has been made, the IP remains with the freelancer is not uncommon and can help protect your work and encourage payment!
If the contract specifically states that the client can’t use the work without paying the freelancer, there could be a legal challenge if work created is then used.
Managing expectations
Managing expectations is important for a good working relationship for both parties. Being transparent about what is included and in scope, the likely timeframes, and what may be outsourced elsewhere, or charged extra is key to ensuring expectations are managed and met.
The last thing either party wants is work produced that doesn’t meet expectations or is outside of scope and then payment becomes an issue.
This is why including a schedule of deliverables or statement of work with milestones and payment points is so important. Making sure you’re both on the same page about the project from day one can help to avoid any disputes.
Once a brief has been agreed, setting out who needs to take what action is the next step – are branding guidelines needed? Is a new supplier form required? Do introductions need to be made to an external marketing agency for high resolution logos etc?
Contingency
We all know that businesses change their minds and their strategy from time to time. If project goalposts move, or personnel change, make sure you have included a renegotiation clause to enable a revised project brief or amended timeframe, and adjusted costings to be set out.
It is also worth including phrasing related to potential issues such as poaching of freelance personnel working with you, or responding to Subject Access Requests if they are submitted, and making clear if any compensation or additional charges can be levied in such circumstances.
Want to find a simple, easy contract for services template?
Our HR Shop offers downloadable templates covering everything you need, including contract for services, Contract for Services (Self Employed) | Robinson Grace HR so you can spend less time on paperwork and more time freelancing.
Check out our other blogs in the series:
If you would like support with taking on or being a freelancer, please get in touch via clientservices@robinsongracehr.com or call us on 01793 311937.
The content of our blogs is intended for general information and not to replace legal or other professional advice.