What is IR35?
IR35, otherwise known as the Intermediaries Legislation, is concerned with your employment status (employed or self-employed) for the purposes of tax and national insurance. It’s designed to prevent “disguised employees” from obtaining a tax advantage by operating through a limited company.
If you’re caught by the legislation, or “inside IR35”, you’re treated as “employed for tax purposes” which means you must pay PAYE tax and NICs on your contract rate.
If you’re not caught by the legislation or you’re “outside IR35”, you’re free to determine your own salary and dividend strategy to suit your tax-planning aims. This means you’ll usually pay less tax and take home more of your money.
Inside IR35 | Outside IR35 |
You’re deemed to be “employed for tax purposes” | You’re deemed to be in business on your own account |
Tax and NI paid in line with employment levels | Free to account for your own tax and NI on your income through your limited company |
Travel and subsistence expenses are not allowed | Travel and subsistence expenses can be claimed |
Are you inside or outside IR35?
The real question here is, are you genuinely in business on your own account, or are you a “disguised employee”? This sounds like it should be simple, but with no statutory definition of employment or self-employment, IR35 status must be reviewed against the backdrop of case law and precedent.
Your IR35 status can vary between contracts, and both the details of your contract and your actual working practices must be taken into account, so correctly determining your IR35 status is not a simple matter. That’s why we recommend anyone who’s contracting through a limited company gets a professional status review from an IR35 specialist for each new contract.
There are many things to consider, and this is not an exhaustive list, but here are some common factors that can affect your IR35 status:
Control – do you decide when, where and most importantly, how you undertake the work?
Right of substitution – are you required to complete the work personally, or could you provide a suitably qualified substitute?
Mutuality of obligation – does the client have an obligation to offer you more work, and if they do, are you obligated to accept it?
Financial risk – how much of the financial risk is yours, and how much lies with the client?
Basis of payment – are you paid by the job or by the hour?
Multiple clients – do you have several clients, or do you work exclusively for just one?
Part and parcel – to what extent are you part of the client’s organisation; do you attend staff meetings, social events or training? Do you use staff facilities or receive staff benefits?
Who decides if you’re inside or outside IR35?
If your client is classed as a small private company, or is entirely based overseas, you are responsible for assessing your own IR35 status.
If your client is a public-sector body, or a large or medium private sector company, the responsibility for assessing IR35 lies with them. If you’re inside IR35, the fee payer (usually a recruitment agency) is responsible for making the correct deductions of PAYE tax and National Insurance contributions.
In either case, it’s important that you know what your correct status is and you understand why. Even if you’re not making the decision yourself, we’d still recommend that you get a professional IR35 review and that you discuss your status with your client. Remember, they’re not IR35 specialists and will likely need your input to help them come to the right decision.
HMRC’s CEST Tool
In 2017 HMRC launched an online tool to help assess IR35 status. It was aimed at public-sector bodies, who had just been made responsible for assessments, but it can be used by any and all stakeholders. Unfortunately, many believe it’s not fit for purpose, and it’s been widely criticised for ignoring some case law and giving inaccurate results. Much of the controversy is around mutuality of obligation, which the tool ignores completely as HMRC believe it exists in every contract. It might still be worth using it, if only so you know what it says, but we wouldn’t suggest that anyone blindly accept the results.
The consequences of an incorrect IR35 decision
So, what happens if you or your client make the wrong decision? Obviously, an incorrect “inside” decision will leave you paying extra tax and NICs, and this will often have a significant impact on the amount of money you take home. An incorrect “outside” decision will leave you paying less tax and NI than you should. HMRC can investigate years later and up to 100% of the debt can be added as a penalty charge. It’s very much in your interests to ensure your status is correct.
What to do if you know you’re inside IR35
The one thing you shouldn’t do is ignore it; working outside IR35 when you should be inside is very risky indeed. As to whether you should carry on running your limited company, this depends on why you chose to go limited, and whether you’re going to be inside for all your contracts.
If you’re likely to be inside IR35 for every contract, and you’re only running your company to maximise your take home pay, then you might be better off opting for umbrella employment instead. You’ll take home roughly the same amount of money, and you’ll get full employment rights too. If this applies to you, a specialist contractor accountant will be able to advise on when and how it’s best to close your company.
However, even if you’re working inside IR35 there could be many good reasons for keeping your company open. For example, many contractors find that being a company director improves their standing with their clients and makes it easier to secure more work. Maybe you’ve put a lot of time and effort into building up your brand and your business and you don’t want to risk losing it. Maybe you expect your next contract to be outside IR35.
