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What is IR35? How Does it Affect You?

What is IR35?

If you’re contracting through your own limited company (PSC) you’ve probably heard of IR35, also known as the Intermediaries Legislation. It can be complicated, and there are plenty of confusing details and opposing opinions online, but it’s important to have an understanding of what it is and how it affects your contracting business. So, what is IR35, and does it apply to you?

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What is IR35?

IR35 is a piece of legislation intended to tackle perceived tax avoidance by so called “disguised employees” and it concerns your employment status for the purposes of tax and National Insurance Contributions (NICs). In simple terms, if you’re trading through a PSC but you’re otherwise working like an employee, IR35 seeks to ensure you pay broadly the same tax and NICs as an employee would.

It’s important to note that this legislation is only concerned with your employment status for tax and NICs; being “caught by”, or “inside” IR35 does not mean you’re employed in any other sense. For example, you shouldn’t expect to receive employment rights like holiday pay or sick pay on the basis that you’re inside IR35.

 

What is the purpose of IR35?

Contractors operating through a PSC are able to enjoy a level of tax efficiency, by paying themselves a combination of salary and dividends. End clients engaging contractors in this way do not pay employers national insurance, or any other costs associated with employment.

HMRC believed that many contractors who were trading through PSCs should have been engaged as employees instead. The commonly quoted scenario describes a worker leaving employment on Friday and returning on Monday as a contractor in the same role – allowing them and their employer/client to reduce the amount of tax they pay.

IR35 is intended to tackle this scenario, by removing these advantages in the case of “disguised employees”.

How does IR35 affect you as a contractor?

Your IR35 status affects how you pay tax on the income you take from your limited company. If you’re inside IR35, your relationship with the client is deemed to be one of employment, and you are viewed as being “employed for tax purposes”. This means you have to pay PAYE tax and NICs on your invoice value. Being found to be inside IR35 also limits your ability to claim expenses.

By contrast, if you’re outside IR35 this means you have a genuine business to business relationship with your client. This allows you to take a combination of salary and dividends, and gives you access to a wider range of expenses claims, which will ultimately affect your take home pay.

Does IR35 apply to you?

IR35 applies if you’re a UK taxpayer providing services through a UK company to an end client. There are two common scenarios where IR35 does not apply:

  • If you’re providing services through an umbrella company or agency, and PAYE tax and NICs are deducted at source, you’ll fall outside the scope of IR35.
  • If you’re self-employed and providing your services directly to the end client rather than through a PSC. In this case the client must be confident that you’re genuinely self-employed, as they might be seen to be the “deemed employer” if you’re not. Because of this risk, many end clients are unwilling to engage contractors in this way.

Who determines your IR35 status?

Before April 2021

Unless your client is a public-sector body, you are responsible for determining your own IR35 status, and your company is liable for any unpaid tax and NICs if you get it wrong. If you’re working in the Public Sector, your end client is responsible for determining your status, and liability lies with them.

After April 2021

Where the client is classed as a small private company or is based overseas, you are responsible for determining your own IR35 status. In all other cases the end client is responsible.

Many contractors are concerned about losing the right to determine their own IR35 status, worried that end clients will not do so correctly, and they’ll be wrongfully found to be inside IR35. At the same time, many clients are concerned about their new responsibilities, and the risk and cost associated with them.

Factors affecting your IR35 status

IR35 is concerned with your relationship with the end client, and whether or not it resembles an employment relationship. As there is no statutory definition of either employment or self-employment, IR35 determinations are based on case law. There are three primary factors that affect your status:

Personal service or substitution

Do you have to provide the services yourself, or do you have the right to send a substitute?

Control

To what extent does the client control what you do, and where, when and how you do it?

Mutuality of obligation

To what extent is the client obliged to offer you paying work, and to what extent are you obliged to accept work when offered?

Secondary factors

There are also several secondary factors that may affect your status, depending on the situation. These include looking at whether you take any financial risk, provide your own equipment, work for multiple clients, and whether you could be considered to be part of the client’s organisation.

No single factor will determine your IR35 status on its own, and the case law the tests are based on has evolved over decades of court decisions. This makes IR35 determinations involved and complex, and specialist expertise is required.

If you have questions or if we can help in any way, please call our expert team on 01296 468 483 or email info@orangegenie.com or learn more from our  IR35 news platform.

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