1. IR35, what is it and how does it affect tax and NI?

What is IR35?

IR35 is not an official set of tax rules. It was the reference given to information documents released as part of the 1999 Budget statement, marking the beginning of a long consultation. It suggested a solution to prevent the loss of tax and NI contributions where individuals, who would otherwise be subject to PAYE on their income, provided their services through companies they owned. The main sector where the government saw this as a problem was the IT industry. This perception still lingers.

Naturally, IR35 met with a great deal of opposition (this remains true today) not least from the businesses that the would-be employees worked for, particularly banks, insurance companies and big businesses. If the government got its way, they were concerned that it might lead to the granting of employment rights to the persons now working for them through their own companies, not to mention employers’ NI contributions. In the end, the legislation which came out of the IR35 consultation in 2000 placed the burden of PAYE tax and NI on the workers (or to be more accurate their companies) and not their clients.

Whether the IR35 rules apply to work an individual’s company contracts for turns on whether or not they would be classed as an employee if they worked for the client directly.

What are the “off-payroll” rules?

The off-payroll rules were introduced in two stages. The first took effect in April 2017 and was limited to contracts for work with public bodies. The second stage, applying from April 2021, extended the 2017 rules to work done for private sector clients. However, these rules do not apply if the engaging client is a small company, business or other organisation. The meaning of “small” is looked at in detail later. The main effect of the off-payroll rules is to put the onus on the business etc. receiving or paying for the services of individuals via an intermediary.

Where the off-payroll rules don’t apply, the responsibility for deciding if IR35 applies remains with the individual doing the work or their intermediary, e.g. their company or partnership.

In essence, the off-payroll rules are a mechanism for deciding who is responsible for determining a worker’s employment status, and, where it’s the recipient of the services (the client), how the process is administered, e.g. the calculation and deduction of PAYE tax and NI.

What’s the effect of IR35 on tax and NI?

As a business owner, especially a director shareholder, the effect of IR35 on income can be significant and it’s therefore not to be taken lightly. For example, if IR35 were applied to £40,000 of a company’s income, assuming the director had no other income, it would cost around £7,500 in PAYE tax, NI contributions, plus approximately £3,500 employers’ NI for the company (the company wouldn’t have a corporation tax bill). That’s a total of £11,000. This compares to a total cost of around £8,800 tax and zero NI if the same amount of income were taken as dividends. The extra costs must be accounted for out of the money the business charges the client.

Working through a company or other intermediary whose income is caught by IR35 is doubly bad news. Not only will the individual suffer PAYE tax, employees’ and employers’ NI, but they won’t usually get the advantages usually associated with employees, namely employment rights such as statutory payments, e.g. sick pay and paid holidays. There are also some limitations on job-related expenses that can be claimed, specifically travel costs.

 

2. Employment status

Who and what does IR35 apply to?

IR35 applies to work done by individuals through intermediaries, e.g. companies and partnerships (but mainly the former). It applies where the services of an individual are made through an intermediary in which the worker has an interest, for example they own 5% or more of the shares in a company which has a contract to carry out work for a client. HMRC often refers to these as personal service companies (PSCs).

IR35 doesn’t automatically apply to all the work done through the company etc. Each contract for work must be tested to see if IR35 applies. The question that must be asked is really one of employment status, Would the individual be employed by the client if the PSC (or other intermediary) wasn’t placed between them?

Because each contract with each different client must be tested it means IR35 might apply to some of the company’s income but not all of it.

Note. IR35 doesn’t apply if someone works directly for a client and not through a company or partnership. The same arguments are involved, i.e. whether the work is or isn’t on an employed basis, but the responsibility for determining this rests with the person the individual is working for.

What are the three key conditions when considering employment status?

Employment status is often not easy to establish. There are indicators which point to employment status, while equally there are those which point to self-employment. In a dispute with HMRC over status it generally puts emphasis on the former. Individuals should do the opposite if they want to avoid IR35 applying.

The key employment status indicators used when considering IR35 originate from Ready-Mixed Concrete (South East) Ltd v Ministry of Pensions and National Insurance 1968.

There are three conditions, all of which have to apply for an employment to exist. Where any of them doesn’t exist, the work dneo is not on an employed basis and so IR35 ought not to apply.

A word of warning though. Some tribunal and court decisions have in the past confirmed employed status even where one or two of the conditions are uncertain, but the other (usually condition 2 below - the control condition) has indicated employment. Therefore, it’s best to make sure, as far as possible, to avoid all three conditions applying.

The conditions are that:

1.       The individual agrees that in return for a wage or other remuneration to personally work for another person or business.

2.      The individual agrees while doing the work that they will be subject to the other person’s control.

3.      The other terms of the work and the contract for that work are consistent with an employment contract.

Each condition must be considered carefully. The courts (and HMRC) have done this through a succession of cases and identified different factors which together indicate whether or not each condition applies.

Factors linked to the first condition

The first condition is that the individual agrees that in return for a wage or other remuneration to personally work for another person or business. This is usually referred to as “mutuality of obligation”.

There cannot be a contract of any kind, including an employment contract, without an exchange between the parties involved, i.e. the individual gives something in return for something given by the client - the individual and the client then have obligations to each other.

What form can the obligations take?

In practice the obligations are that the individual agrees to provide their own efforts to do a task and in return the client must pay them.

Note. Sometimes it’s suggested that the obligation of the client is to provide the individual with work and if they don’t then they haven’t met their side of the bargain - therefore there is no mutual obligation and so the contract is not one of employment. The court record is not totally coherent on this, but this view does not look correct. No one can be forced to give someone work if they have none to give. All that is needed for the mutual obligations to be met is simply for the client to be obliged to pay the individual for the work that they actually do.

What is meant by substitution?

Substitution can be the single most important factor, not just for the mutuality of obligation condition, but in ensuring that employed status is avoided.

A genuine and broadly unrestricted right that allows the individual to send a substitute to do the work they would normally do will mean that the status of the work cannot be one of employment. It follows that the status must be self-employed and so IR35 will not apply.

To elaborate, the first of the three key conditions needed for a contract to be one of employment requires that the work has to be done by the individual’s own hands. The right to send a substitute must therefore mean that the relationship between the individual and their client is not an employment.

Note. If there are significant restrictions in the contract on who the individual is allowed to send as a substitute, it probably won’t prevent the contract from being one of employment.

What counts as a significant restriction to substitution?

The question of what constitutes a significant restriction, often referred to as a fetter, is not clear cut.

HMRC inspectors like to argue that almost any restriction on substitution points towards an employment. This is wrong on two counts:

• a restriction can only prevent the first of the three conditions from applying. The other two conditions must still exist for there to be employment. In other words, the lack of a right to send a substitute worker does not automatically lead to a contract being one of employment
• some types of restriction aren’t sufficient to prevent a substitution clause from being a get-out of employed status.

A bureaucratic requirement that does not actually prevent substitution happening but just adds terms, for example, a requirement to produce evidence of identity or qualifications, or a requirement for the employer’s permission where they have to exercise that right reasonably (perhaps for security reasons), can be ignored. It is important, though, that the individual must be able to send a substitute whenever they want, and not just (for example) when they are ill or on holiday.

Factors linked to the second condition

The second condition required for a contract to be one of employment is that the individual agrees while carrying out the work they will be subject to control by the person they are working for.

Control is probably the most debated of the conditions and the one on which the employment status often turns.

How much control is enough for the condition to apply?

You’ll often hear, especially from HMRC, the phrase “master and servant relationship”. It’s rather old-fashioned sounding, but it’s still used almost whenever employment status is in question. It comes direct from the judge’s words in the Ready-Mixed Concrete case.

In order for an employment to exist the level of control required must be “sufficient to make that other [the employer] the master”. In most work situations the amount of control needed for this to be the case isn’t very high.

A useful example of control in an employment situation, much quoted by HMRC inspectors, is the role of a ship’s captain. He can be told when and where to take his ship, but not how to take it there. Whilst he is at sea the level of control exercised by his employer over what he does is minimal and largely invisible, yet no one would seriously doubt that he is an employee.

Does control by the client always mean the condition is met?

Even in a contract which is clearly not one of employment, control can be found. For example, if an individual’s trade is as a decorator the choice of paint colour etc. would be controlled by the client, but they would not supervise how the individual did the work. No one would suggest that sort of control indicated employment.

Types of control

Over the years the courts have identified four different aspects of control:

1.       What is done.

2.      How it is done.

3.      When it is done.

4.      Where it is done.

It’s vital to look at all four because in some situations one or more of the aspects can be almost irrelevant in determining whether control exists because they are dictated by the job itself rather than the client.

For example, to clean an office requires the cleaner to work in that office irrespective of whether there is any control by the client - therefore the “where” aspect is not a pointer in either direction. Likewise, if work is required on a large site which is only open during normal business hours - the “when” is not a pointer to whether or not the control condition exists.

Consider the types of control in context of the work. If they go hand-in-hand with it, the individual should resist suggestions by HMRC that they are relevant indicators of control. Conversely, if the client controls how the work is done it is a very strong indicator and it will be difficult to argue that the control condition isn’t met.

Note. The accepted consensus is that it is the right to control that is important, not the actual exercise of it. The fact that an individual’s clients don’t need to use their rights of control doesn’t prevent the condition existing.

Factors linked to the third condition

The third condition that needs to exist for there to be an employment is that the other terms of the arrangement are consistent with a contract of employment. This is a kind of sweeping up condition with many different aspects to it. The courts have not on the whole been very forthcoming about what it means.

The individual will need to ask them self whether there is anything in the contract that is inconsistent with a contract of employment. Two things in particular have been suggested as incompatible:

• if someone is expected to produce a thing (or a result) for a price. Normally speaking a piecework contract will be one of self-employment for this reason
• if the picture painted is of the individual being in business on their own account it will indicate self-employment meaning IR35 won’t apply. This consideration is sometimes referred to as the economic reality test.

Over the years the courts have identified the various factors, sometimes referred to as “the trappings of business”, that should be considered by an individual in the form of questions they can ask themselves. These are:

• do you own the equipment required for the work?
• financial risk - is there a risk of your making a loss?
• is there opportunity to make a profit?
• what are the length and number of engagements?
• do you have a business structure?
• do you work exclusively for one client?
• what are the payment terms?
• is there a right of dismissal?
• what is your and your client’s intention regarding employment status?
• are you part and parcel of the organisation?

The answers to these questions are indicators of either a contract for service (self-employment) or a contract of service (employment). None of them on their own are conclusive evidence either way, they’re just helpful pointers. It is also not a tick-box exercise deciding this: the individual will have to stand back and look at the overall picture.

We’ve elaborated the factors below.

Do I own the equipment required for the work?

Owning the equipment needed to do the work is a pointer towards self-employment. It should be noted the courts (and HMRC follows their lead on this) will only pay much attention to this point if the equipment involved is something that ordinarily would be very expensive and that would not otherwise be purchased, for example, if someone wanted a tool to dig your garden they would probably buy a spade, they wouldn’t buy a digger. However, if they were a landscape gardener you might well do.

Note. Owning a computer to help with the work isn’t significant; most people of working age own one these days. Similarly, if the individual is a tradesperson, owning a few tools won’t help argue a self-employed status unless they are very expensive.

Financial risk - is there a risk of making a loss?

As many will know from experience, being in business involves trying to make a profit while running the risk of making a loss. Where there is no risk it can indicate that the trader is not in business on their own account and so points away from self-employment.

How relevant the risk test is will depend on whether the services the individual performs are of a nature that a loss can readily arise. If not, the answer to the question will have little or no importance. This is because some types of service can be provided on a self-employed basis without any real chance of making a loss.

Is there an opportunity to increase profit?

A person in business can increase the profit they make by managing costs, e.g. staying in cheaper accommodation while away on business, doing their own bookkeeping instead of paying an accountant, etc. These factors won’t usually be relevant for an employee.

What are the length and number of engagements?

The length and number of engagements may be an important factor in determining whether an individual is in business on their own account. The greater the number and the shorter each engagement is, the more likely it is that the big picture will show that they are running a business rather than being an employee.

Note. HMRC’s Employment Status Manual makes the valid point that the length of an engagement is not a consideration on its own, but goes along with two other factors: integration into the organisation of the client and control by the client. It is a good idea therefore to consider these points together.

Do I have a business structure?

If someone is in business on their own account, it’s likely they’ll have a recognisable business structure, e.g. a system for billing and paying bills, finding customers and so on.

Do I work exclusively for one client?

HMRC often makes a great deal of this point, and usually if someone works only for one client it will generally be a fairly strong pointer to employed status. However, it acknowledges in its Employment Status Manual that it’s by no mean always the case. The manual gives examples of an insurance agent committed to selling the products of one company, and an author agreeing to write for only one publisher. Common sense is needed to assess whether exclusivity is a relevant factor.

What are the terms of payment?

A fixed monthly salary usually goes with a contract of employment (a contract of service), whereas if someone is paid on completion of a particular project it indicates self-employment (a contract for services). The trouble is that there’s a large grey area in-between, and except in marginal situations it’s unlikely that the payment terms will have much impact on the overall picture.

Note. Payment by way of non-monetary benefits is an indicator of employment, as it is not normal if someone is in business on their own account to be paid in benefits unless there is a very particular reason. If an individual is asserting that they are self-employed, non-monetary benefits as a form of payment are best avoided.

A second angle which needs to be considered is where the trader pays the person they have the contract with, e.g. where the individual collects money from a third party and pass a percentage or a fixed sum on to the other party. For example, taxi drivers often have a contract with a taxi firm whose business name etc. they use, but they are self-employed and collect fares, part of which are handed to the taxi firm. It will need very strong contrasting circumstances for the relationship to be one of employment.

The requirement to produce an invoice is indicative of self-employment, but not a strong one.

Is there a right of dismissal?

The right of dismissal in a contract shouldn’t be given too much weight as an indicator towards employment. A client will want to have the right to dispense with someone’s services if they are not competent to do the work, and in practice will do so whether such a right is included in the contract or not.

It is unlikely to be of much importance on its own (except in a finely balanced situation). However, it could be a supporting factor.

Am I part and parcel of the organisation?

The answer to this question is more often than not a reflection of the overall picture. That is, if someone is in business on their own account typically they will not be part and parcel of the client’s organisation, and vice versa. Although that won’t always be true HMRC places some weight on it when considering employment status. Therefore, it makes sense to avoid giving the impression of being integrated within a client’s business.

If possible, it is advisable to try to avoid things like business cards with the client’s name, or using an e-mail address with the client’s name on it. Likewise, if the individual has a LinkedIn account, they should make sure that it shows them working for their own business, not the client’s.

Employment status - summary

Three conditions must usually exist if the work arrangement with the client is to be considered an employment, and therefore the resulting income subjected to IR35 tax and NI. Here we set out the key questions an individual looking at their status must ask themselves.

First condition - personally providing services in return for pay

• do you have the right to send a substitute to do your work?
• is the right limited (ignoring requirement for red tape)?

If the individual can send in a substitute worker of their choice that absolutely rules out the work being on an employed basis.

If the individual cannot send in a substitute, or the client applies restrictions on who they can send, it is an indication towards employment and subject to the other conditions IR35 might apply.

Second condition - control over the worker and their work

• when does it apply?
• where does it apply?
• how is it applied?
• what does it apply to?

If there is a sufficient right of control by the client it is a strong indicator that the work done is on an employed basis and IR35 will apply.

Third condition - economic reality (being in business on own account)

• can you increase profit from managing your business carefully?
• do you have a financial risk as a result of your work?
• do own equipment to carry out your work, and is it expensive such that you would not buy it unless you were in business?
• what is the length and number of your business contracts?
• do you work exclusively for one client?
• do you have a business structure?
• are you paid like a typical employee, e.g. have rights to paid holiday and sick pay?
• do you get paid piecework or on a time basis?
• does your client have the right to dismiss you?

If the picture formed from asking all the questions above is one of the individual being in business on their own account, it is a good indication that the work done is not on an employed basis and so IR35 would not apply.

3. Contracts and arrangements

What parts of the contract are especially important for IR35?

A great deal of each contract the individual will have with their clients will be devoted to general matters such as the work that needs to be done, the relevant charges, etc. These won’t usually be an issue for IR35. However, clauses regarding control, supervision of the work, including putting right faulty work and substitution, will be factors for determining whether or not IR35 applies. How the business affairs are arranged will also have an impact.

As a general rule, individuals should avoid saying things in a contract unless they are necessary. However, it is important to note that the wording of the contract will not be a persuasive argument unless it reflects the commercial reality of the relationship. For example, including an unrestricted substitution clause won’t avoid IR35 applying if in reality the client insists on the individual performing all the work personally with no right of substitution, i.e. the contract wording is just for show.

What basic rules should be followed if IR35 is to be avoided?

There are basics individuals should observe when agreeing contracts and making arrangements for work where IR35 might be an issue:

1. First, and most importantly, they need to make sure that the contract for services reflects the facts on the ground, including the existence of intermediary, that is, the personal service company. That means that the contract must be made between it and the client, and not the individual and the client.

Note. It’s believed that HMRC is challenging contracts made between the client and the individual actually providing their services with increasing frequency.

2. The client should pay the money into the company’s bank account, never a personal account.

The two points above are fundamental for trying to stay off the IR35 radar. If an individual doesn’t follow them, they might be left arguing that the worker is acting as some sort of agent for the company. This might work, but HMRC is unlikely to be impressed and will certainly fight the assertion. At best, in the event that HMRC starts asking questions, it will put the trader on the back foot from the start.

3. Where possible, avoid mentioning the individual’s name in the contract. If possible the contract should just agree that the company will provide whatever the services are for the client.

It’s not necessary for the company to have a contract with the individual, and probably not advisable. If it does, this will be likely to be an employment contract: this would first of all bring the arrangements within the ambit of the national living wage rules, secondly, it would inevitably be a pointer towards employment.

4. Individuals should keep evidence of the negotiations with the client. Evidence can come in many forms so the trader might need to produce copies of e-mails - so it’s advisable not to delete them, or if they do to keep a hard copy.

5. Individuals should keep timesheets, as these will show when they are not working as well as when they are, and it’s also advisable to keep details of any speculative work done which can be a powerful indicator of being in business on their own account. In addition, diary notes might tell when they are working from home or going out marketing.

Why is a substitution clause so important?

As mentioned, a right of substitution in a contract can be sufficient on its own to prevent the contract counting as one of employment. It’s important, therefore, if possible not to give the client a right to refuse the substitute or limit the circumstances when the individual can do so.

However, as mentioned above the individual should not insist on a substitution clause if the client has no intention of sticking to it. In the event of questions from HMRC to the client it will soon be apparent that the clause is a sham and so cast suspicion on the arrangements as a whole.

It is better to say nothing at all than to include an unreliable clause in a contract.

On a practical note if the trader includes a substitution clause, they should try to obtain evidence that in reality they would be able to exercise it. For example, if there is another worker in a similar position who has sent in a substitute, this would strengthen the position.

In 2021 the courts have introduced some doubt over the significance of substitution clauses in contracts. In 2021 the Employment Appeal Tribunal (EAT) in Smith v Pimlico Plumbers Ltd 2021 the judges said that the right of substitution, which existed in the contracts between the company and its workers, was trumped by the obligation of the worker for personal performance of the work. So, while a right of substitution existed it would be difficult for the worker to exercise it.

What about paying a substitute?

Where the individual does send in a substitute, the client should continue to pay the company and not the substitute worker or their business. The individual’s company can then pass on whatever amount they have agreed to pay the substitute.

In 2018 HMRC changed its Employment Status Manual (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm0531) so that it no longer asserts that it is necessary for the worker to pay the substitute rather than the client paying them direct. However, it continues to hold the view that the worker must be responsible for finding the substitute. This is a reasonable view.

In the unlikely event that a client pays a substitute worker directly, and HMRC takes issue, the individual will need to remind it that the fundamental point in question is whether in the contract and in practice a substitute is allowed. If it is permissible that the trader can send in a substitute, there is a lack of obligation of personal service and so the first condition for an employed status doesn’t exist, which means IR35 can’t apply. The method and route the payment takes is a red herring.

HMRC manuals are guidance and not a legal authority. Anyone who disagrees with HMRC’s assertions should be bold enough to point this out to a tax inspector should they try to rely on them to prove their argument.

How should a substitution clause be worded in a contract?

If a right of substitution is included in a contract, it should be clear what it entails. Individual should ask themselves the following questions:

• is there an obligation for you to find a substitute if you aren’t able do the work?
• can substitution take place in any circumstances or only when you are unable to do the work, say, through illness?
• can the client veto the substitute, and if so on what grounds? - these should be specified
• who pays the substitute (ideally this should be your company)?
• if the client pays the substitute, who is responsible for the substitute’s work?

What other terms should be covered in a contract?

We’ve already suggested leaving out of a contract what doesn’t need to be stated. That doesn’t mean to say what actually happens during the course of the work is ignored, but there’s no point including a speculative term if it isn’t needed. Terms regarding how and when the individual does the work are important when considering the “control” condition of employment status. Therefore, subject of course to not stating something in a contract which doesn’t represent the terms and conditions in practice, bear in mind the following.

1. Control of when the individual performs the work. It’s advisable to avoid clauses which allow the client to dictate when the individual can do the work. Deadlines are generally OK. It’s the day-to-day control that care should be taken over. The trader should ask themselves:

• can you come and go as you please?
• is there a required number of work hours or times when you can or cannot work?

The individual wants to avoid IR35 applying it may be best not to mention much about control in a contract. Control in practice is largely a matter of common sense, and all that writing it down is likely to achieve is to give away a right of control where in practice none is required.

2. Control of how the individual performs the work. Traders should avoid clauses which indicate the need to report to others or for supervision of any work.

An important factor in HMRC’s eyes is whether the individual is obliged to remedy any defects in their own time and at their own expense. If they are, it is worth mentioning in the contract as this points to the work not being an employment and so outside of IR35.

While not a point that needs mentioning in a contract if the trader takes out insurance at their own expense to cover against claims for faulty work, this will help any argument against employed status.

3. Right of dismissal. This does not need stating in the contract, so the complete absence of anything about dismissal, or a dismissal clause containing entitlements, will be an indicator that the trader and their client intended to set up a self-employed relationship. By contrast, a dismissal clause entitling the individual to a certain number of weeks’ notice, perhaps with payment in lieu, is the kind of clause that one typically finds in an employment contract, and so should be avoided.

4. Provision of equipment and materials. Where appropriate, clauses that indicate that the individual is required to provide tools and materials for the work point towards self-employed status and are helpful.

Keeping a list of the equipment and materials that have been supplied of the individual’s own expense can help add to an argument that they are in business on their own account.

5. Working for one client. If possible, individuals should avoid exclusivity clauses, i.e. where they tie them to working for one client.

6. Calculating payment. HMRC often makes a big deal of how payment for work is calculated, but its view seems muddled. It associates hourly rates of pay or pay by the day with employment.

In the event HMRC raises the issue of the terms of payment it is worth pointing out that while there are plenty of employed labourers who are paid at an hourly rate, so are accountants and solicitors who are clearly self-employed. Similarly, self-employed building contractors will price work based on the number of days it takes.

7. Payment in kind. It is advisable to keep payment terms to money only. Avoid being paid with non-monetary benefits.

Should the individual write the contract themselves?

As the provider of the service it would be usual for the trader to create the contract for agreement by the client. However, larger clients especially will want a greater say in what goes in the contract. This should not cause a problem with HMRC - after all, the terms of work will always be negotiable. The key from the individual’s point of view is to satisfy themselves that it is not going to cause the work to be caught by IR35.

The position is the same where they work through an agency; however, in that situation the client might be the agency or they may provide a ready-made contract suggesting that it is “IR35 proof”. It is crucial not take that as gospel; it should be considered in light of the employment status conditions.

If the client insists on terms that will cause IR35 to apply, the individual will need to bear this in mind when agreeing the rate of pay. If it’s going to cost more in tax and NI, then they might want to increase the rate accordingly. However, to get the work they might be willing to swallow the extra cost. Either way traders need to understand the position so that they are not caught off guard by unexpected tax charges or an HMRC enquiry.

If the trader is not using a ready-made contract they will need to write one. This could be a standard template which they use for all clients which can be modified as required to cover specific terms that the trader and the client agree on, e.g. rate of pay.

If the trader is not familiar with contracts, it will probably be better to have a solicitor draw one up.

Note. Scottish contract law differs in some respects from English, and so where a contract is to be governed by Scottish law or where both parties reside in Scotland, it will not necessarily apply.

When one party is in Scotland and the other in England, it is essential to say which law will govern it.

Northern Irish law is different again, although it bears a closer resemblance to English law. Therefore, the same principle that the contract should be written according the proper jurisdiction applies.

Can HMRC imply terms into a contract?

HMRC can speculate about implied terms, but cannot definitively read them into a contract. This is because in the event of a dispute going to court, it will only imply terms if it is necessary for them to exist.

When writing or considering a contract keep in mind that there are four circumstances where terms can be implied. Where:

• they are so obvious that they do not need stating
• they are customary in the business or an employer’s well-known practice
• the contract cannot work without them; or
• they give effect to the reasonable expectations of the parties.

The fourth point is self-explanatory; the first three are considered below.

1.       Obvious terms and conditions. It is not necessary to state obvious terms and conditions in a contract because it can be implied if it is obvious. Of course, what’s obvious to one person might not be obvious to someone else. It’s a matter of common sense.

2.      Customary terms and conditions. Again, it is not necessary to include terms and conditions that are customary to the industry or client’s business in a contract. They can be assumed to apply as long as they are very well known.

3.      Can the contract work without them? Again, a term or condition can apply without being expressed in a contract if the contract can’t otherwise operate.

Example

A dispute involved an area sales manager for a company who had been convicted of drink-driving; he had said that in the event of losing his licence he would buy a company car and provide a driver (his wife) so that he could continue in the job. His employer took the view that the loss of his licence effectively prevented him from doing his job.

The Employment Appeal Tribunal noted that while his contract did not specifically state that the employee must be in possession of a driving licence, the fact that under the contract he was provided with a company car to do his job meant it couldn’t work if he didn’t have one. The need for a licence was pure common sense.

What if an implied term is not consistent with a written one?

In short, an implied term or condition can’t override one that’s included in a contract.

However, if what’s written in a contract is clearly at odds with the actual terms and conditions applying in practice, HMRC can argue for, but can’t insist, that they are taken into account as if they were in a contract. Ultimately only a court can decide if it’s appropriate.