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IR35
The Ultimate Guide to IR35 – Demo with ACF Copy (JF TESTING)
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Introduction
Understanding IR35 and whether you fall inside or outside can be a challenge. Much information surrounds the legislation, its technicalities and how it could impact you as a contractor. Our comprehensive guide covers all you need to know. We’ll answer all of the frequently asked questions, such as “What is IR35?” and “How does IR35 work?” as well as look at the difference between inside IR35 and outside IR35 and how status is determined.
IR35’s nuances mean contractors can’t be expected to know the law inside out. Please only use this article as a guide. If in doubt, refer to HMRC’s website or seek professional advice.
Understanding IR35 and whether you fall inside or outside can be a challenge. Much information surrounds the legislation, its technicalities and how it could impact you as a contractor. Our comprehensive guide covers all you need to know.
Key takeaways
- IR35 determines whether contractors are taxed as employees (inside IR35) or self-employed (outside IR35).
- Assessments are made per contract through a Status Determination Statement (SDS) by the end client.
- Key factors for IR35 status: Control, Substitution, and Mutuality of Obligations (MOO).
- Responsibility for SDS lies with the end client for public sector and medium/large private companies.
- Incorrect IR35 assessments can result in tax liabilities, interest, and penalties for the decision-maker.
- HMRC provides tools and guidelines for determining IR35 status, but professional advice is recommended.
What is IR35?
Navigating the intricate landscape of UK tax legislation is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: IR35. But what is IR35, and why does it matter?
In this comprehensive guide, we delve deep into the heart of IR35. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to demystify IR35, empowering you with the knowledge to make informed decisions and remain compliant.
Background to IR35
Permanent employees and contractors are treated differently under UK law. If a contractor provides services through their own limited, they may take some of their pay in dividends instead of taxable salary.
They can also offset several business expenses against Corporation Tax and pay less in National Insurance Contributions. This lower tax burden reflects the more significant financial risk of being self-employed.
HMRC introduced IR35 (or the ‘off-payroll working rules’) in 2000 to tackle ‘disguised’ employment. When a contractor is a ‘disguised’ employee, they take advantage of the tax efficiency of working through a limited company despite being treated and working as though they are an employee by the end client.
HMRC views these disguised employees as avoiding tax by taking advantage of the reward with none of the corresponding risks.
The benefit for employers is that they don’t have to pay employers’ National Insurance contributions or give the contractors employee benefits. The benefit for contractors is that they can pay themselves through their limited company to minimise their tax burden.
Employer’s liability insurance covers you in the event of a compensation claim by an employee where they have suffered injury, illness or accidental death due to their employment. It is legally required if you have employees and unnecessary if you do not.
For contractors, if you are the director of your limited company, are the sole employee and own more than 50% of the shares, you are exempt. Costs start from around £60 per year and are an allowable business expense.
Employer’s liability insurance covers you in the event of a compensation claim by an employee where they have suffered injury, illness or accidental death due to their employment. It is legally required if you have employees and unnecessary if you do not.
For contractors, if you are the director of your limited company, are the sole employee and own more than 50% of the shares, you are exempt. Costs start from around £60 per year and are an allowable business expense.
Employer’s liability insurance covers you in the event of a compensation claim by an employee where they have suffered injury, illness or accidental death due to their employment. It is legally required if you have employees and unnecessary if you do not.
For contractors, if you are the director of your limited company, are the sole employee and own more than 50% of the shares, you are exempt. Costs start from around £60 per year and are an allowable business expense.
Employer’s liability insurance covers you in the event of a compensation claim by an employee where they have suffered injury, illness or accidental death due to their employment. It is legally required if you have employees and unnecessary if you do not.
For contractors, if you are the director of your limited company, are the sole employee and own more than 50% of the shares, you are exempt. Costs start from around £60 per year and are an allowable business expense.
How Does IR35 Work?
IR35 applies on a contract-by-contract basis; it does not apply once to your entire company. For each contract, the relevant ‘decision-maker’ (usually the end client) prepares a Status Determination Assessment (‘SDS’). The SDS looks at the engagement contract’s wording and the contractor’s day-to-day working practices and decides whether IR35 applies.
Three key factors are considered when assessing a contractor’s IR35 status:
1. Supervision, Direction and Control
Does the contractor maintain autonomy over what work has to be done, when it has to be done, and where it has to be done? If not, this points to an employee-employer relationship.
2. Substitution
Does the contractor have the right to provide a qualified replacement in their place should they be absent for any reason? If not, this is an indicator that the contract is inside IR35.
3. Mutuality of Obligations
Mutuality of obligations exists when an employer has a legal duty to provide work, and the employee has a legal duty to perform said work. It is a vital part of a traditional employee/employer relationship.
See our guide to The IR35 Rules for further information.
HMRC offer detailed guidance notes and an online tool to help decision-makers determine whether IR35 is relevant. Third parties also specialise in performing these assessments and providing insurance against a potentially incorrect determination.
Who Performs The IR35 Assessment?
IR35 applies on a contract-by-contract basis. For each contract, the relevant decision-maker prepares a Status Determination Statement (‘SDS’), which looks at the engagement contract’s wording and the contractor’s day-to-day working practices.
The party responsible for preparing the SDS depends on the industry in which the client operates, the size of their business, and the location they’re based. The responsibility for performing the SDS lies with the end client/fee payer if:
- The client is in the public sector; or
- The client is in the private sector and classified as a medium or large company.
Private sector companies are classified as medium or large-sized if they meet two or more of the following conditions, they:
- Have an annual turnover of more than £10.2 million;
- Have a balance sheet total of more than £5.1 million; or
- Have more than 50 employees.
How is IR35 Status Determined?
There is no ‘HMRC approved’ template for IR35 assessments. Instead, those responsible must review the contract and the day-to-day working realities against the IR35 rules. HMRC look at both when performing an investigation.
IR35 Assessment Process for Contractors
There is no ‘HMRC approved’ template for IR35 assessments. Instead, those responsible must review the contract and the day-to-day working realities against the IR35 rules. HMRC look at both when performing an investigation.
Frequently Asked Questions
1. What is IR35?
IR35 is a set of UK tax laws introduced to prevent ‘disguised employment,’ where contractors work as employees but gain tax advantages by operating through a limited company.
2. How does IR35 impact contractors?
If your contract falls inside IR35, you’re treated as an employee for tax purposes, meaning higher tax and National Insurance contributions. Outside IR35 allows contractors to operate with more tax efficiency.
3. What is the difference between inside and outside IR35?
Inside IR35 means your work is akin to an employee’s, and you pay taxes as such. Outside IR35 signifies genuine self-employment with tax benefits and financial risks.
4. How is IR35 status determined?
IR35 status is based on factors like control, substitution, and mutuality of obligation (MOO) in your contract. HMRC’s CEST tool or professional advice can help assess your status.
5. What happens if I’m caught inside IR35 but operate as outside?
You could face tax penalties, backdated payments, and additional scrutiny from HMRC. Always ensure compliance with the rules.
6. Where can I find official guidance on IR35?
Visit HMRC’s website for comprehensive details, tools, and updates on IR35 legislation.
Salary calculators
1. Inside IR35 Salary Calculator
Calculates net pay for contractors taxed as employees under IR35 rules, factoring in income tax, employee,
and employer NICs, leading to reduced take-home pay.
Calculate now
2. Outside IR35 Salary Calculator
Estimates take-home pay for self-employed contractors who can use tax-efficient methods like dividends
and claim business expenses.
Calculate now
3. Permanent Employee Salary Calculator
Determines net pay for full-time employees by accounting for PAYE tax, NICs, and possible
pension contributions.
Calculate now