What is IR35, and what does it mean for contractors?

What is IR35?

IR35 is short for the UK tax legislation and designed to identify contractors and businesses that avoid paying the appropriate tax by working as 'disguised' employees or are engaging workers on a self-employed basis to 'disguise' their actual employment status.

IR35 and working as a contractor

If you work as a contractor through a limited company, you can pay corporation tax at 20% on your profits, claim business costs against your tax bill and avoid making National Insurance Contributions (NIC) by paying yourself through dividends.

As a result, working as a contractor is often a more tax-efficient set-up than working via an umbrella company or as a team member of a company. In reality, many contractors operate in the same way as employees are intentionally or unintentionally gaining a tax advantage over others working in the same way as them.

What does inside IR35 mean?

To be operating 'inside IR35' means that, under the IR35 legislation, you must pay the same tax as an employee. This could also mean that you are entitled to additional rights as an employee or worker (e.g. minimum wage, maternity pay, protection from discrimination).

If you're working inside IR35, you will usually have to pay a 'deemed payment' of income tax at the end of the tax year to account for any tax deductions or NIC that an employee would have paid.

What does outside IR35 mean?

To be operating 'outside IR35' means that the IR35 legislation does not prevent you from paying tax on the private contractor basis described above. This means you can pay yourself a salary and withdraw further income as dividends (which are not subject to NIC), whilst your limited company pays tax only on its profits at the corporate 20% rate.

Things that indicate you are outside IR35 and are operating as a business include:

• Having business insurance
• Marketing yourself via a professional website
• Owning your own equipment and working for multiple clients

Can I get any advice on IR35?

As a contractor, you should consider getting detailed advice on your IR35 status involving reviewing your service contracts and your day-to-day working practices that the BRS Jobs team can support you with.

Does IR35 apply to limited companies?

IR35 will affect you as a contractor if you work for your own limited company. Suppose, you work through an umbrella company (a limited company that employs contractors and acts as a third party supplier between the contractor and the client). In that case,  you don't need to worry about IR35 as you're already paid through the PAYE system and work under a contract of employment with the umbrella company.

IR35 doesn't apply to sole traders either, but rules for determining employment status do. This means that if the contractor is registered as self-employed but working as an employee, the end client will be responsible for paying any additional tax due.

While the contractor holds no liability for their employment status, they may still experience a reduction in earnings as they will have to be placed on the company's payroll.

If you are a contractor working through a limited company, you must understand how the legislation works and apply best practices. This means you must meet HMRC's definition of self-employment by making sure your work is project-based, you are not managed by anyone client-side, you haven't offered exclusivity to any clients, and you have contracts linked to the completion of services, as opposed to a continuous relationship.

If your contract is deemed inside IR35, it is possible to continue working through a limited company. Your client will have to deduct income tax and NIC for this contract.

IR35 checklist

The following is a non-exhaustive IR35 compliance checklist of some factors that indicate whether you are inside or outside IR35. As noted above, you should consider getting detailed advice on your IR35 status involving a review of both your service contracts and your day-to-day working practices before you take on any additional work.

Your role falls Inside IR35 if you meet any of the following:

1. You carry out all of the work that your company is contracted to do personally
2. You work for your own limited company but receive employment benefits such as paid leave or sick pay
3. You are being paid on a time basis
4. You have close supervision by somebody in your client's business
5. You are supplied with the equipment by a client and work at their premises
6. You work for one client long-term
7. All rejected work is corrected at your client's cost
8. You do not have your own business identity

Your role falls outside IR35 if you meet any of the following:

1. You have the right to delegate or substitute work contracted to another person, and that right is exercised in practice
2. You work for your own limited company and do not receive employment benefits such as paid leave or sick pay
3. Being paid on a project basis or at a fixed price
4. You have the right to decide how and when you work and can send a substitute to do the job if you please
5. You supply the appropriate equipment and may work from your own premises
6. You work with more than one client at one time or on short successive projects with a variety of clients
7. All rejected work is to be corrected at your own cost
8. You have your own premises, insurance and branding

If you're looking for further support on IR35, how to determine your status or advice on proceeding with an upcoming role, contact our team of experts at BRS Jobs via info@brsjobs.co.uk or call us on 01276 538403.