Beginner’s guide to IR35

What is IR35?

IR35 is a piece of legislation created by HMRC to crack down on tax avoidance in the contracting sector. It aims to catch, and appropriately tax, those contractors who operate using a limited company, but whose day-to-day work life is much closer to that of an employee than a contractor/freelancer. The terminology HMRC uses is ‘disguised employees’, which pretty clearly explains the concept!

Why is it important? ?

One of the main advantages of setting up a limited company is the tax efficiencies it offers. As the director of a limited company, you can choose how to draw money from your company, such as through a combination of salary and dividends. This flexibility allows you to structure your income in a way that minimises your tax liability. In contrast, as a sole trader or employee, you are taxed on all your earnings at standard income tax rates.

For example: Your company makes a profit of ￡500k, but you only draw ￡50k out of the company. You then pay minimal personal Income Tax and National Insurance on your drawings.

(You can find more information on this in our beginner’s guide to tax <add link>.)

Inside IR35 vs outside IR35

To operate as a limited company, you must find and complete ‘outside IR35’ contracts – in other words genuine contractor/freelancer roles. If you are found to be working ‘inside IR35’, you can no longer benefit from the tax efficiencies detailed above. In this situation, earnings from your role are broadly required to be subject to Income Tax and National Insurance, just like a ‘normal’ employee would be, via their payslip.?

In most cases, IR35 wipes out any benefit of having a limited company and adds extra admin and red tape to extracting the already-taxed funds out of your company.

How do I know if I am inside IR35?

The IR35 legislation is an incredibly complex document, but several court cases and judges’ decisions have led to the development of three criteria. You will be deemed outside IR35 if all of these apply:

• Personal Service: Are you the only person that can do this work? If only you can do the work, you will be considered inside the rules. If you can send a substitute to work in your place, you will remain outside the rules. But this needs to be realistic. Just having a clause in your contract that states “Joe Bloggs Ltd can send any one of its employees as a substitute for Joe Bloggs” is useless if you, Joe Bloggs, are the only employee.
• Control: Do you have a duty of service to the business? If you are free to do the task how you want, when you want, and where you want, you are not an employee. However, HMRC accepts that performing the task at a time and place to suit the client does not necessarily make you an employee, as it is sometimes the only practical way.
• Mutual Obligation: If the business provides work, do you have to do it? If you are occasionally unable to assist them because you have other client work to do, you can stay outside the rules.

These are the main three criteria, but there are other basic indicators that can suggest you are a genuine contractor running a business, as opposed to an employee:

• Do you work for?several different clients?
• Do you?provide your own equipment?
• Do you have?financial risk?(e.g. put right errors in your own time/refund for bad work)?
• Do you regularly?promote your business, via advertising, networking, or other marketing?
• Do you have a?separate business telephone number / website / insurance / office space?
• Do you?invest in training?/ retain profits for “on the bench” time?
• Are you?registered with Data Protection?/ have ISO9000 accreditation?
• Are you?VAT registered?/ do you maintain detailed accounts?
• Do you?consider yourself as a business owner?(the correct mindset is important)?

With IR35, the determination is rarely cut and dry. While you can self-assess and ask us for pointers, we would always strongly recommend that you have your contract reviewed by professionals. There are a few different organisations that can help, but many of our clients use QDOS. They offer individual contract reviews and also insurance packages to help defend your company against IR35. (Our clients enjoy discount off their prices.)

What are my responsibilities?

This is a tricky area, as HMRC seem to change their mind every couple of years. But as with most things HMRC, the answer they’ve settled on is… it depends!

There is a ‘subsection’ of the IR35 rules named the ‘off-payroll working rules’.

These rules put the emphasis on the end client to assess whether a contract is within IR35, but only if the end client is a public authority or a private company that meets two or more of these conditions:

• It has an annual turnover of more than ￡10.2 million.
• The balance sheet total is more than ￡5.1 million.
• The client has more than 50 employees on average in an accounting year.

If your client does not meet these conditions, then it is up to you as the contractor to apply the rules, get guidance and professional input (if necessary), and make the call on whether the contract on offer will be deemed inside or outside IR35.

This means the risks and rewards also lie with you, so you need to be careful. Make sure you do your due diligence and have evidence. The two main sources of evidence you could obtain are:

·??????? Getting your contract professionally reviewed and saving the determination outcome from the review.

·??????? Make use of HMRC’s online CEST (check employment status for tax) tool. Provided the information you provide is 100% correct, HMRC will honour any outcome provided.

Ask us your IR35 questions

We hope this short trip in the world of IR35 has been helpful. If you still have questions or are unsure about any of the rules, we can try to help you untangle an answer. Just get in touch, we love chewing the IR35 fat! And if we don’t know the answer, we will always point you in the right direction.

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