How to Write an IR35-Compliant Contract

Your contract is the first thing HMRC will examine in an IR35 investigation. While the tribunals consistently say that reality trumps paperwork, the contract sets the framework for your working arrangement. A well-drafted contract that accurately reflects genuine self-employment is your first line of defence. A poorly drafted one — or one that contradicts your actual working practices — is an invitation for trouble.

In this guide, I will walk you through the key clauses that support an outside IR35 determination, common mistakes to avoid, and practical tips for ensuring your contract reflects reality.

Why Contracts Matter in IR35

There is a common misconception that contracts are irrelevant for IR35 purposes because "HMRC looks at the reality, not the paperwork." This is a half-truth. HMRC does look at reality, but the contract is the starting point for that analysis. If the contract says you can substitute and you actually can, the contract supports your position. If the contract says you can substitute but you never have and never could, the contract is worthless.

The ideal position is a contract whose terms match the reality of your working arrangement. When there is alignment between what the contract says and what actually happens, both the contract and the practice reinforce each other.

According to HMRC's Employment Status Manual, the written contract is examined first, but where the reality differs from the written terms, the reality takes precedence.

Key Clauses for an Outside IR35 Contract

Right of Substitution

A substitution clause grants you the right to send a suitably qualified person to perform the work in your place. This is one of the strongest indicators of self-employment. The clause should:

• Give you an unrestricted right to substitute (the client should not have an unfettered right to refuse)
• Require the substitute to be suitably qualified (this is reasonable and does not undermine the clause)
• Make you responsible for paying the substitute (not the client)
• Not require the client's prior approval (though notification is acceptable)

A strong substitution clause looks something like: "The Contractor may at any time provide a substitute to perform the Services, provided the substitute is suitably qualified and experienced. The Contractor shall be responsible for the remuneration of any substitute."

A weak clause requiring the client's consent, or one that has never been exercised in a long-running engagement, will carry less weight. For a deeper analysis, read my article on IR35 and substitution.

Control

Your contract should make clear that you have control over how you perform the work. Relevant terms include:

• The client cannot dictate the method of performing the services
• You determine your own working hours (within reasonable project requirements)
• You are not required to work exclusively at the client's premises
• The client provides the scope and deliverables, not step-by-step instructions

Avoid language that implies supervision, direction, or client control over your working methods. Phrases like "the contractor shall report to" or "working hours shall be" suggest employment-level control.

No Mutuality of Obligation

The contract should make clear that there is no obligation for the client to offer further work or for you to accept it. Key provisions include:

• The engagement is for a defined project, deliverable, or period
• There is no guarantee of ongoing work beyond the current scope
• Either party can terminate with reasonable notice
• You are not obligated to accept any additional work the client offers

Contracts that automatically renew, or that describe an open-ended engagement without defined deliverables, suggest mutuality of obligation.

Financial Risk

Include provisions that reflect genuine financial risk:

• You are responsible for providing your own equipment (laptop, software, tools)
• You carry professional indemnity insurance
• You are responsible for correcting defective work at your own cost
• Payment is based on deliverables, not hours worked (where possible)
• You bear the cost of travel and subsistence

Independence

The contract should establish that you are an independent business, not part of the client's organisation:

• You are described as an independent contractor, not a consultant, freelancer, or worker (these terms can be ambiguous)
• You do not receive employee benefits (holiday pay, sick pay, pension, etc.)
• You are not subject to the client's grievance or disciplinary procedures
• You may work for other clients during the engagement

Common Contract Mistakes

Contradictory Terms

The worst contracts contain clauses that contradict each other. For example, a right of substitution in one paragraph followed by a requirement for personal service in another. HMRC will seize on these contradictions to argue that the true nature of the engagement is employment.

Review your contract as a whole to ensure consistency. Every clause should support the same picture: a genuine business-to-business relationship between your PSC and the client.

Boilerplate Without Substance

Some contracts include IR35-friendly clauses as boilerplate — standard text inserted without thought. A substitution clause that looks identical across hundreds of contracts, regardless of the actual engagement, carries little weight. HMRC is well aware of this practice.

Ensure your clauses are tailored to your specific engagement and that the provisions are realistic. A substitution clause for a highly specialised role where only three people in the country could do the work needs careful thought.

Schedule of Work Too Vague

A contract that describes the services as "providing IT consultancy services" without further detail offers little protection. The schedule of work should describe specific deliverables, projects, or objectives. This demonstrates that the engagement is task-based rather than ongoing employment.

Missing Termination Provisions

Employment contracts typically include notice periods, while commercial contracts may include termination for breach or convenience. A contract with a lengthy notice period (several months) and no provision for termination for convenience looks more like employment. Reasonable notice periods (two to four weeks) with clear termination provisions support self-employment.

Contract vs Reality: The Critical Alignment

I cannot stress this enough: your contract must match your working practices. If your contract says you can substitute but your client would never accept it, the clause is worthless. If your contract says you control your hours but you work 9-to-5 every day at the client's office, the clause is worthless.

Before signing a contract, walk through each IR35-relevant clause and honestly assess whether it reflects what will actually happen. If it does not, either renegotiate the terms or adjust your working practices to match.

For a step-by-step guide to assessing your IR35 status based on both contract and practice, read my article on how to determine your IR35 status.

Working with Agencies

If you work through a recruitment agency, the contract chain typically involves two agreements: one between the agency and the end client, and one between the agency and your PSC. Both contracts are relevant for IR35 purposes.

As a contractor, you have direct control over the contract between the agency and your PSC. Ensure this contract includes the key clauses discussed above. You may have less control over the agency-client contract, but you should ask to see it or request confirmation that it does not contain terms that undermine your outside IR35 position.

For more on how agencies handle IR35, see my guide on IR35 for agencies.

Getting Professional Help

For significant engagements — particularly those with high day rates or long durations — having your contract reviewed by an IR35 specialist is a worthwhile investment. A specialist can identify problematic clauses, suggest improvements, and provide a written opinion on whether the contract supports an outside IR35 determination.

The cost is typically £200-500 for a contract review, which is modest compared to the tax at stake. Many specialist firms also offer insurance that covers the cost of defending an HMRC IR35 investigation.

As IPSE advises, professional contract reviews are particularly important for contractors working for medium and large private sector clients, where the off-payroll rules place determination responsibility on the client.

Practical Tips

• Keep copies of all versions of your contract, including any amendments
• Document instances where you exercise rights under the contract (substitution, flexible working, refusing additional work)
• If the client makes changes to the engagement that affect IR35 status, update the contract accordingly
• Do not rely on a single clause — the contract as a whole must paint a consistent picture of self-employment
• Review your contract at each renewal or extension to ensure it remains current

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