IR35 Guide

The ultimate IR35 guide for contractors, freelancers and the self-employed

In This Guide

The Essential IR35 Guide for Contractors

The information surrounding IR35 is so vast that it is overwhelming. In addition, after undergoing multiple changes over the years it has been in place, the current dialogue surrounding IR35 is confusing, full of jargon, and completely inaccessible to the average person. So, if you still feel like you don’t quite understand what IR35 is, don’t worry – you’re certainly not alone.

In response to the haze of confusion surrounding IR35, The Essential IR35 Guide for Contractors aims to provide you all the vital information you’ll need to manage your interaction with IR35, clarifying common doubts and misconceptions, and most importantly, helping you stay on the right side of the law.

What is IR35?

IR35 refers to the off-payroll working rules set in place by the HM Revenue & Customs (HMRC).  

Why does IR35 exist?

Her Majesty’s Government believe that people working through a Personal Service Company (PSC) who would have been employees if they had been engaged directly ought to pay (broadly) the same Income Tax and National Insurance contributions (NICs) as if they were employed. After all, it is only fair that two individuals doing the same job in the same way pay broadly the same tax and National Insurance, even if one of them structures their work through a company.

However, the government estimates that only 10% of individuals working through PSCs apply the rules correctly. People who do not abide by the rules are deemed “disguised employees”. It is estimated that this improper behaviour costs Her Majesty’s Exchequer hundreds of millions of pounds every year in lost tax revenue.

Thus, the purpose of IR35 is to ensure that people pay the correct taxes for their employment status, and prevent individuals from trying to ‘game the system’ by using an intermediary (e.g. a limited company), and pay less tax.

Who decides if and when IR35 applies to contractors?

As of 6 April 2017, in the public sector only, IR35 status is determined by the client (or agency), not the contractor. If a client decides IR35 does apply, the contractor (or contractor’s limited company) will be taxed at source, recorded through the Real Time Information (RTI) system, exactly as if it were an employee.

In the private sector, it is your responsibility to determine whether your contract is inside or outside IR35. If the contract is inside IR35, your limited company will pay Income Tax and NICs to HMRC on a “deemed employment payment”.

IR35 emphasises the hypothetical contract or working relationship between the client and the contractor. This means that organising contract work through a Limited Liability Company (LLC) or PSC does not exempt you from IR35. Under IR35, one-person companies still constitute intermediaries, and therefore can fall under IR35.

Why should I care about IR35?

  1. As a piece of legislation, non-compliance with IR35 could result in severe consequences. If the HMRC suspects that you are inside of IR35, they can choose to carry out an inquiry. Following this process, HMRC will tax your total income for the period in question as salary, and attempt to recoup the applicable tax and national insurance contributions previously paid as dividends. This is likely to be a substantial amount of money. For example, the BBC news presenter Christa Ackroyd was fined £420K under IR35!
  2. HMRC has not ruled out investigating public sector contractors retrospectively. This means that even if you have ceased working through your limited company after 6 April 2017, you could still be subject to investigation.
  3. If you comply with the legislation, IR35 can have a real impact on your take-home pay. If IR35 applies to your contract, you have to pay income tax and NICs as if you were an employee, losing up to 45% of your pay. This makes assessing your potential work options tiresome, as you will have to check whether or not every potential role is IR35 friendly. This also means that it will be extremely difficult for you to compare employment opportunities, since your post-tax income for any given job is not immediately apparent, since you don't really know if each job will be subject to IR35 or not.
  4. The client you work for can categorise you as ‘employed for tax purposes’ under IR35, while being under no obligation to provide you the same employment rights you would be entitled to if you were actually employed by them. This means that you could end up internalising all the costs of being an employee, while seeing none of the benefits!

Okay, but does IR35 apply to me?

A common way to describe a worker (or role) that is caught by IR35 is to say that they are ‘inside’ IR35. There are many factors that play a part in deciding if you are inside IR35 – the Revenue questionnaire to determine IR35 status is over 80 questions in length, which indicates that they try to consider as many factors as possible.

While it is in some sense good that every case is decided on an individual basis, this means that there are also a great deal of things to account for when examining your contract to see if you are inside IR35. While this list isn’t by any means exhaustive, here are some characteristics that could indicate that you are inside of IR35:

  • You are managed by your client, as opposed to being free to work under your own control
  • You cannot send someone else to conduct the task you've been contracted to do
  • You get employment benefits like sick, holiday, or maternity pay
  • Your contract grants you a period of notice in the case of dismissal

To streamline the process of assessing your IR35 status, you could try using CEST, the online tool provided by the HMRC which is intended just for that purpose. However, use the tool with caution, for it has been heavily criticised as being ineffective, being biased towards a conclusion that IR35 applies, and in about 15% of cases, not even producing an answer at all!

Need more guidance? Don’t face IR35 alone.

Contractor Club can help you. The Contractor Club matches you with employment companies (umbrella companies and alternatives) which will help you work legally alongside IR35. Umbrella companies are organisations that can handle your employment, payroll, expenses, and taxes for you, match you to lucrative jobs, and manage your day-to-day administrative matters. This gives you peace of mind in terms of your tax compliance.

In addition, Contractor Club provides a comparison tool for different umbrella companies – ensuring that you find the best, most cost-efficient umbrella company for your needs. This means that you are guaranteed to save time and money.


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