If you’re thinking of becoming a contractor or consultant, you can’t escape talk of IR35. And for good reason – it pays to be in the know. But what is IR35? This guide will look at IR35 in detail and try to clear up some of the complexities.
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.
What is IR35?
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 (Schedule 12). It aims to ensure contractors working as ‘disguised employees’ and their employers pay the same level of tax and National Insurance as employees.
What does IR35 mean for me?
Put simply, your IR35 status (which can vary from contract to contract) 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).
IR35 and the public sector
In April 2017, the way IR35 works in practice changed, and the public sector were the first to go ‘over the top’. As of writing (November 2019), the changes in the public sector are about to become the norm in the private sector too.
The ‘public sector’ is defined by the Freedom of Information Act (2000), it includes broadly any government body such as a local council, the NHS, Ministry of Defence, the BBC, higher education institutes, fire services as well as many, many others.
In 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 – and you’ll also be responsible for the brolly fees. A triple whammy for contractors and consultants.
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”.
IR35 and the private sector
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 2020, 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.
How is IR35 status determined?
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. Find out more about how you can determine your IR35 status here. HMRC have also introduced an Employment Status Service (CEST) tool (please be aware that there is some controversy surrounding the shortcomings of this tool!). This service can be used to find out if you should be classed as employed or self-employed for tax purposes.
The majority of contractors and consultants are working hard to find contracts that are outside IR35 – and there are plenty of clients who’ll work hard to get contracts outside IR35 if it means attracting the best talent. If you are inside IR35, you pay more tax than if you were an employee, as well as other fees, with none of the benefits.
You might be fine with that – it’s a personal choice. If you do find yourself inside IR35, with inniAccounts it’s easy to manage any contracts you have both inside and outside of IR35. You can read more about managing IR35 contracts with inniAccounts here.
Remember, the influence you have when negotiating contracts is not just about your rate, but also the contractual terms. If you are offered a contract deemed by the end client to be inside IR35, or you are unsure of your contract status, continue to seek professional advice from experts in IR35 such as The Law Place. This will help prevent being falsely identified as an employee, and they can help identify alternative terms to remain outside the legislation.