Contracting - Do I really need a contract?

Contractor's Question: I've just been offered a piece of IT work from an organisation I know well, and who I've worked with on projects for a while. They need some work doing for the short-term - I know what to do, they know what they want to me to do, and everyone's clear on all that.

But on first glance, the contract seems to present major IR35 issues (such as substitution, mutuality of obligation) and I want to get it checked properly before signing. However as that process will take some time, with both sides needing to review, is it acceptable to simply get on with the work, in the absence of a signed contract? After all, it's them buying a service (I have a purchase order from them in writing) and me charging them for that service through a monthly invoice. So is it safe to proceed without the paperwork in place, or should I wait for the final, formal, signed contract?

Expert's Answer: If there are difficulties with the offered contract, it is best to avoid signing it as it will only make the situation worse. For this reason, proceeding under a purchase order may well be a viable alternative in the short term. As HMRC are often keen to state, IR35 is assessed primarily on the realities of the relationship anyway, not the written contract itself.

Despite this, to state the obvious, even without a formal written contract, a contract will still be in place because, as you say, they buy the services and you/your company completes them. Any written contract is at best only evidence of the nature of the relationship. If you proceed without a written contract the terms of any such contract will be implied. There are however difficulties with this approach.

Firstly, the absence of a written contract is likely to mean your business operations will be more intensely inspected by HMRC, as they attempt to establish the nature of your relationship when assessing compliance with IR35. Also the absence of a contract means any assessment of IR35 is less likely to go in your favour. For example, contractors rarely use a right of substitution. Without written evidence of this right or an example of actual substitution, HMRC will claim it does not exist. The same applies for mutual obligations. This means the usual protections against an adverse IR35 assessment may not be available unless they are blatantly obvious in the way you work.

Secondly, even though you did not sign it, it could be argued that the original contract represents the nature of your relationship and sets out the agreement to provide services going forward. This implied acceptance could mean you suffer from the IR35 issues you sought to avoid in the original contract. You would need clear evidence in writing that this contract was rejected and that you are proceeding on the basis of a purchase order alone.

Thirdly, and to answer your directly, this approach is not safe. Operating without a written contract means the terms of your relationship may not be clear. If anything goes wrong, you will be exposed. This is true in areas such as the terms and dates for payment, insurance, liability for your actions, ownership of any intellectual property, notice and reasons to terminate, etc. As a minimum, you would need to be able to show evidence of any implied agreed terms through emails or letter to stand any hope of being protected should the client not pay, throw you out, claim ownership of your know-how, etc. But even then this may not be enough. There will of course be commercial pressures on you and your client to get the job done which may force both parties to 'play fair' if there is a dispute before the proper contract is signed, though relying on an agreeable response is a very dangerous leap of faith.

The expert was David Buckle, head of the employment practice at Cubism Law.

Friday 6th Aug 2010
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