IR35 Proof Contract: What is it and Why is it Important?
If you are a contractor or freelancer in the UK, you may have heard of the term “IR35”. In a nutshell, IR35 refers to a set of tax regulations that determine whether a contractor is considered an employee for tax purposes. If you are found to be “inside IR35”, you may be subject to additional taxes and penalties, while being “outside IR35” means you are free to operate as an independent contractor.
One way to ensure that you are operating outside IR35 is to have an IR35 proof contract. An IR35 proof contract is a written agreement between you and your client that outlines the terms of your engagement. This contract must demonstrate that you are not an employee, but rather a self-employed contractor, and that you are free to work for other clients.
So, what should an IR35 proof contract include? Here are some key elements:
1. Clarity on the Type of Engagement: The contract should clearly state that the engagement is for a specific project or task, rather than an ongoing employment relationship. It should also state that you are engaged as an independent contractor, not an employee.
2. Control and Direction: An IR35 proof contract should demonstrate that you are in control of how the work is carried out, and that your client does not have the right to tell you how to do your job. For example, you should be able to decide when and where you work, and what tools and equipment you use.
3. Substitution: This is an important element that can help demonstrate that you are not an employee. The contract should state that you have the right to send a substitute to carry out the work, if you are unable to do so yourself. This means that you are not tied to the client, and can hire others to do the work on your behalf.
4. Financial Risk: An IR35 proof contract should show that you are taking on some financial risk, such as by providing your own equipment, covering your own expenses, and potentially facing penalties for poor performance. This helps to demonstrate that you are running a business, not simply providing a service as an employee.
5. Mutuality of Obligation: This is a tricky one, as it is often seen as a key indicator of an employment relationship. However, an IR35 proof contract should show that there is no ongoing obligation on the part of the client to provide work, and no ongoing obligation on your part to accept work. This means that the relationship is project-based, rather than ongoing.
In summary, an IR35 proof contract is an important element of any contractor’s business. It can help to demonstrate that you are operating as a self-employed individual, rather than an employee, and can provide protection against potential additional taxes and penalties. If you are a contractor, or considering making the move from employment to self-employment, it is important to understand IR35 and ensure that your contracts are written with IR35 compliance in mind.