As a contractor, freelancer or small business, it’s important to have an awareness and understanding of IR35 to ensure that you are paying the correct amount of tax and National Insurance. It’s a complex subject and it can be difficult to self-assess your status under IR35 rules. In this guide we’ll analyse IR35, breaking down the complicated subject into easy to understand and manageable pieces.
IR35 is an initiative designed to combat tax avoidance. More specifically, it was HMRC’s response to a growing number of employees leaving their permanent roles, setting up their own businesses and then – often the next day – returning to perform their old role as a contractor, and paying the Chancellor less in the process. IR35, or the Intermediaries Legislation, is a group of legislation within the Social Security Contributions (Intermediaries) Regulations 2000 and the Finance Act in 2000. It aims to ensure contractors working as ‘disguised employees’ and their employers pay the same level of tax and National Insurance as employees.
Put simply, your IR35 status determines your tax position with HMRC. It’s important to understand the definition and your personal risk of being defined as a ‘disguised employee’ for each contract you undertake. IR35 runs across every business sector and specialism.
If you’re deemed to be “inside IR35” – or subject to IR35 legislation it simply means that you’ll need to pay the same types of taxes that employees and employers pay. Namely, you’ll pay income tax and employee’s National Insurance on your income – as well as paying employer’s National Insurance. You’ll be taxed as if you were an employee, but with no benefits of employment (holiday, sickness, maternity, pension, gym, Christmas parties etc).
If you’re working for a public sector client, they are responsible for determining your IR35 status – and they will tell you if a contract is inside or outside IR35. If the contract is inside IR35, the public sector body (or an agency in between) is responsible for deducting tax and National Insurance, thus paying you net of these deductions. In reality, if a role is inside IR35, many clients / agents will insist that you use an umbrella company to take care of this.
One thing to keep in mind is that whilst the way IR35 is applied changed in April 2017, the rules used to determine if IR35 applies remain unchanged. Whilst some public sector bodies were initially (and some still are) risk averse, there are plenty of public sector roles that are advertised outside IR35. Just hop onto a job board and search for outside IR35.
In the private sector, however, independent professionals remain responsible for deciding if IR35 applies to the contract with their employer. Contractors and consultants are responsible for paying the correct levels of tax and National Insurance. This will change in April 2021, when the public and private sector will align, and the end client will determine IR35 status, and take responsibility for deductions for contractors inside IR35. The only exception will be small client companies who are freed from this burden.
There are a lot of factors that are assessed to determine whether you are operating outside IR35 (as a truly self-employed contractor) or inside IR35 (as a disguised employee) and it can vary from contract to contract. HMRC have also introduced an Employment Status Service (CEST) tool.