Contracts for Services: A Guide for UK Small Businesses
A contract for services governs work done by a self-employed contractor — or by your business for a client. It’s not the same as an employment contract, and the difference has real legal and financial consequences. Here’s what the contract should cover and why the reality of the working relationship matters as much as the document.
Contract for services vs contract of service
| Contract of service (employment) | Contract for services | |
|---|---|---|
| Governs | Employer and employee | Client and self-employed contractor or freelancer |
| Statutory rights | Full rights — unfair dismissal, redundancy, SSP, paid holiday | No statutory employment rights in most cases |
| Tax responsibility | Employer deducts income tax and NIC via PAYE | Contractor responsible for own tax and National Insurance |
| What determines status | The reality of the working relationship — not the label on the contract | |
The three employment statuses
| Status | Key rights | Tax treatment |
|---|---|---|
| Employee | Full statutory rights — unfair dismissal, redundancy, SSP, SMP, paid holiday, and more | Employer deducts income tax and NIC via PAYE |
| Worker | Intermediate rights — paid holiday, National Minimum Wage, whistleblowing protection; not full employee rights | Often PAYE depending on circumstances |
| Self-employed contractor | No statutory employment rights (Equality Act 2010 and health and safety protections still apply) | Responsible for own self-assessment tax and NIC |
Many gig economy workers have been found to be “workers” rather than self-employed following Supreme Court decisions such as Uber BV v Aslam. The same principle applies to small business contractor arrangements — status follows substance, not labels.
What a contract for services should include
Describe precisely what the contractor will do, to what standard, and by when. Vague scope is the most common cause of disputes about whether work has been satisfactorily completed. The more specific, the better.
The fee structure (hourly, daily, fixed, or milestone-based), how and when invoices are submitted, payment terms (typically 14 or 30 days), and what happens if payment is late. Under the Late Payment of Commercial Debts (Interest) Act 1998, contractors can claim statutory interest on overdue commercial invoices.
Fixed project or ongoing? What notice to end it? Long notice periods can be a red flag in IR35 assessments — genuine contractors typically aren’t locked into extended obligations.
Under UK law, the contractor owns IP they create unless the contract explicitly assigns it to the client. If commissioning creative work, software, or designs, ensure ownership transfers to you. This is the most commonly overlooked provision and the one that causes the most costly disputes.
If the contractor will access sensitive information — client lists, pricing, trade secrets — a confidentiality clause restricts how they may use it during and after the engagement.
Can the contractor send someone else to do the work? A genuine right of substitution is one of the strongest indicators of self-employment for IR35 purposes. If it’s genuinely possible in practice, the contract should reflect it.
Require the contractor to hold appropriate PI and public liability insurance. Include a limitation of liability clause capping exposure — typically to the value of the contract — to protect both parties from disproportionate claims.
Standard provisions: termination for convenience (either party with notice) and termination for cause (immediate, for material breach). Without a termination clause, ending an arrangement early can create contractual liability.
What makes a working relationship genuinely self-employed
The contract is only part of the picture. Indicators of genuine self-employment include:
- The contractor works for multiple clients simultaneously
- The contractor decides how, when, and where to do the work — not the client
- There is a genuine, exercisable right to send a substitute
- The contractor uses their own equipment and materials
- The contractor bears genuine financial risk — must redo unsatisfactory work at their own cost
- The contractor negotiates their own rates and invoices the client
- The contractor is not integrated into the client’s business — no company email, not subject to disciplinary procedures, not managed as staff
If most of these point the other way, the relationship may be employment regardless of how it is labelled. See our IR35 guide for the full picture on tax implications.
The risks of getting it wrong
| Party | Risk if contractor is reclassified as employee or worker |
|---|---|
| Business engaging the contractor | Backdated PAYE and NIC plus interest and penalties; liability for holiday pay going back years; unfair dismissal or redundancy claims if the relationship ends; tribunal costs even if successfully defended |
| Contractor (PSC) | If found inside IR35, may owe income tax and NIC on income — sometimes going back several years — plus penalties and interest |
Contracts vs letters of engagement
Not every service relationship needs a full contract. For shorter, simpler engagements — a designer producing a logo, a copywriter writing one page — a letter of engagement covering scope, fees, timeline, IP ownership, and how to end the arrangement may be sufficient and is proportionate.
For ongoing relationships, high-value projects, or anything involving significant IP, confidentiality, or liability, a properly drafted contract is worth the investment.
Getting a contract drafted
- Use a solicitor for the first contract. A well-drafted template reviewed by a commercial or employment solicitor costs a few hundred pounds and can be reused for future engagements. The cost of one tribunal claim — even successfully defended — is typically far more.
- Free templates exist, but need care. HMRC, Acas, and professional bodies publish templates. These are useful starting points but generic templates may not reflect the specific needs of your business or the nature of the work.
- If you’re a contractor, use a contract for every engagement. It protects your payment terms, your IP, and your status. A client who won’t sign a contract is a risk worth considering carefully.
Useful resources
- Acas employment status guidance — acas.org.uk/employment-status
- GOV.UK employment status checker — gov.uk/employment-status
- HMRC IR35 guidance — gov.uk/guidance/understanding-off-payroll-working-ir35
- Your solicitor — essential for drafting or reviewing contracts for high-value or ongoing engagements
More guides for UK small business owners
Right Hand Man covers everything from contracts and IR35 to PAYE, hiring your first employee, and writing a business plan. Browse our guides or get in touch if you have a question.