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The Ultimate Guide To IR35

Written By Contractors, For Contractors

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.

Table of Contents

What is IR35?

IR35 is an employment status test that determines whether a contract points towards employment or self-employment. It combats tax avoidance by closing loopholes, ensuring contractors working the same way as permanent employees pay the same taxes. If your contract is ‘inside IR35’, it points towards employment. Your working arrangements are similar to those of a permanent employee, so HMRC imposes broadly the same income tax and national insurance liabilities…

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What is Inside and Outside IR35?

Working inside IR35 means that you have been caught by the IR35 rules, and HMRC regards the service you provide to be one of employment. You are considered an employee for tax purposes rather than a self-employed individual running their own business.

Being ‘outside IR35’ means that you are running a genuine business and, therefore, operating outside of the IR35 rules. As an outside IR35 contractor, you are a limited company director, invoicing your client directly and using the company revenues and profits in a way that suits you, just like any other small business owner…

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What is the Cost of IR35?

Since IR35 was first introduced, contractors have tried to ensure they operate as a genuine business outside IR35. Operating in this way ensures they can pay themselves a tax-efficient salary and dividend split. Drawing a small salary minimises income tax exposure and employer and employee national insurance (NI) contributions.

But what happens to those contractors that are caught by the IR35 rules? What is the cost of IR35?

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IR35 Assessments

If you are a UK resident for tax purposes and are considering contracting through an intermediary (i.e., a limited company), IR35 must always be considered. The only variability is around whose responsibility it is to conduct the IR35 assessment.

This is an important point that often confuses new contractors who believe that working with small businesses or overseas clients exempts them from IR35. They are incorrect. Working with small companies or overseas clients means the contractor is responsible for the IR35 assessment and is liable should HMRC investigate and find it faulty….

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The IR35 Rules

When performing a status assessment, the party responsible must consider the written contract and the day-to-day working practices against a framework known as the ‘IR35 rules’. Against these rules, the assessor must decide whether the engagement would be one of employment or self-employment without a limited company intermediary. Is the contractor running a genuine business, or are they operating as a disguised employee?

Three fundamental principles need to be considered: (i) Supervision, Direction and Control, (ii) Substitution, and (iii) Mutuality of Obligation….

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IR35 Compliance and Protection

Being investigated by HMRC does not automatically mean you are a disguised employee. If you take the investigation seriously, seek professional advice, and your contract is genuinely outside IR35, you should be fine. However, if HMRC determines your status assessment is wrong and you have incorrectly been working outside IR35, additional income tax and National Insurance is owed on the work performed. Depending on the circumstances involved, HMRC also has the discretion to issue a penalty….

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IR35 Expenses

Claiming expenses while inside IR35 is notoriously tricky. In April 2016, HMRC legislation came into effect, severely restricting what could be claimed by contractors deemed to be operating in a manner equivalent to that of a permanent employee. While expenses can still be paid, they must be agreed with the end client and paid in addition to your standard contract rate. Unlike limited company contractors working outside IR35, you cannot offset expenses against your earnings…

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IR35, Foreign Companies and Overseas Contractors

International markets can provide lucrative opportunities for UK contractors willing to work with overseas clients. Historically, the jurisdiction of the end client had minimal impact on a contractor’s IR35 status, as a contractor’s UK tax obligations were their responsibility only. However, the changes to the IR35 rules in April 2021 mean that contractors are no longer responsible for determining their IR35 status. Most of the time, the responsibility now lies with the end client or agency that pays the contractor…

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IR35 and Limited Companies

IR35 is forcing many career contractors used to working through a limited company to review their working arrangements. Some have moved into direct employment, while others have been forced to work through an umbrella company. While these solutions offer a more straightforward way of ensuring IR35 compliance, they often mean closing your personal services company. There is, however, another option…

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IR35 and Sole Traders

IR35 does not apply to sole traders as they operate as self-employed individuals. The IR35 legislation only applies to contractors working through intermediaries (such as a limited company). Although IR35 does not apply to Sole Traders, the issue of employment status for tax purposes remains. The rules for determining employment status are similar to those for determining IR35 status.

Which employment status tax legislation applies to you as a sole trader is determined by whether you’re a direct hire or working via an agency…

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Inside IR35 Calculator

Our inside IR35 calculator looks at the financial implications of being caught by the IR35 tax legislation, having to work through an umbrella company.

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Inside IR35 Calculator

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Outside IR35 Calculator

Outside IR35 Calculator

Our outside IR35 calculator looks at the financial implications of working via a limited company.

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