IR35 is an area which often causes concern for contractors and knowing whether or not your fall inside its scope can be difficult. There is a lot of information out there about this legislation and its various technicalities, and the sheer complexity of its nature means that it can be challenging to determine the effect that it could have on your company.
Here, we’ll help you to gain a better understanding of IR35 so that you can become more familiar with this much-feared piece of legislation. Armed with our helpful advice in this blog post, you’ll find handling contracts inside IR35 a lot more straightforward.
IR35 – The Basics
First, let’s take a look at what IR35 actually is. It refers to a piece of tax legislation that determines if someone is really working as a “disguised permanent employee” so that they can benefit from a number of tax relief schemes that are out of reach to permanent employees, or whether they are really self-employed in the true sense.
Anyone who is “deemed employed” by their client is said to be working “inside” IR35 and therefore will be subject to the appropriate taxation. IR35 is applicable to every business specialism and sector, and an individual’s status may change between contracts depending on the contract details and nature of the job in hand.
The Importance of IR35 To A UK Contractor
A contractor’s IR35 status is important because it determines their HMRC tax position, thus affecting the amount of net pay received. A contractor who works “outside” IR35 can divide their income between dividends and a low wage so that their National Insurance and Tax contributions can be minimised. The result is a higher net pay than full-time employees who earn an identical level of base pay.
On the other hand, contractors who are “deemed employees” and who therefore work “inside” IR35 must pay identical National Insurance and Tax contributions as full-time employees, either through the client’s payroll, an Umbrella Company or through their Limited Company. This means that net pay will be lower than on an “outside” IR35 contract.
For this reason, the majority of those looking for contracting opportunities strive to work “outside” IR35 whenever possible.
Determining IR35 Position
As a result of legislative changes introduced by HMRC from April 2007, if you work wholly within the public sector then your client or agency will determine your IR35 status. This essentially means that the decision is taken out of your hands. In these circumstances, joining an Umbrella company becomes more tax efficient than running your own company.
HMRC have devised some basic rules which determine whether a contractor is working outside or inside IR35 legislation:
- If the company is entitled to offer somebody other than the contractor themselves to deliver the contracted services, this is a sign that operation is outside IR35.
- If the contractor is responsible for their own working practices, such as where, how and when they work, they are probably a freelancer working outside IR35.
- Employees are required to work at particular times and their employer is required to pay them, even when there is no work. Contractors who meet this description are probably inside IR35.
As experts in the industry, we can offer you all the advice that you need regarding your IR35 status.