A basic guide to IR35 for Contractors

What is IR35?

IR35 is a complicated piece of legislation designed to close a loophole in the tax system where workers could use a limited company structure in order to pay less tax.

Where, despite a contract being in place with a limited company, the reality is more like an employer-employee relationship, and thus the worker should be taxed as an employee.

What are the effects of IR35 for contractors?

If assessed as inside IR35, you will need to pay the same income tax and NICs as if you were employed. However, you still won’t get any employment benefits, like paid holiday or sick leave.

Research by ContractorUK has revealed:

  • 65% of UK contractors believe their income will decrease following the introduction of IR35 in the private sector.
  • One in five current UK contractors think they will be forced to leave contracting for a permanent role post-April 2020.
  • 62% have predicted that “blanket IR35 inclusions” when contracting job specifications after April 2020 will result in significantly higher tax liabilities.
  • 46% of UK contractors who took part in ContractorUK’s research have admitted that they plan to wait and see what the “initial consequences” will be for the wider contracting market before making a final decision as to whether to remain in the contracting industry.

Inside or Outside?

Determining your IR35 status can be a minefield, so we suggest you seek professional advice.Having a well-drafted set of terms and conditions or contract is not enough.

You need to be able to demonstrate that the clauses are true to your working practices. It is critical that you act and work as a separate entity to your client to fall outside of IR35.

Core areas that determine your status include:

How much control do you have about where you work, which hours etc?

Do you provide your own equipment?

Do you have any employee benefits?

Do you need to fix and errors in your own time, and without pay?

Is there mutuality of obligation?

Can you substitute yourself for another qualified person?

Outside IR35

You will have the responsibility of ensuring that you are paying the right amount of national insurance and tax on the money you receive for your work.

Inside IR35

If you are deemed to be inside of IR35, you will be taxed as if you are a PAYE employee, which means that you will be required to pay national insurance and income tax.

What if I disagree with the decision?

If a contractor or fee-payer disagrees with an IR35 decision, the end client has 45 days to respond and must provide its reasons for the original determination.

The end client will also be required to either confirm or change its decision. If the end client fails to do this, they will then become the fee-payer, meaning the IR35 liability will transfer to them, assuming they don’t carry it already.

When is IR35 being introduced?

As it stands at the moment, the government are planning to introduce IR to the private sector in April 2020. (Budget 2018)

What should you be doing?

As with all dealings with regulatory and financial bodies, scrupulous record keeping is the best way to ensure you can show your independent company status should it ever be questioned.

Then as per our advice above – seek professional guidance.