The ultimate IR35 guide for contractors, freelancers and the self-employed
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.
IR35 refers to the off-payroll working rules set in place by the HM Revenue & Customs (HMRC).
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.
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.
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:
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!
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.