What is IR35?
On 9th March 1999, HMRC issued a bulletin named IR35, detailing how they were going to close the loophole that allowed contractors to avoid paying tax and NICs by using intermediaries, such as personal service companies, composite companies or business partnerships. Essentially, IR35 affects all contractors who do not meet the Inland Revenue’s definition of ‘self-employment’.
IR35 denotes the UK tax legislation designed to tax ‘disguised employment’ at a rate similar to normal full-time employment.
The intention of IR35 is to ensure that if the relationship between a contractor and their client would have been one of employment, had it not been for the introduction of an intermediary, the contractor pays tax and NICs on the same basis as that of an employee of the client
Dealing with IR35
You cannot avoid IR35 and you cannot choose your own IR35 status (and neither can your end client or agency): it is determined purely by your contract and working conditions. Your contract must reflect the reality of your working conditions and the services you provide because they could be checked by HMRC. Contractors have tried to class themselves outside IR35 by adjusting the wording of their contracts but this does not protect them from IR35 legislation. You should think very carefully before challenging your IR35 status as this runs the increasing risk of an HMRC investigation and the danger of backdated tax demands, interest payments and/or a fine.
In the past, contractors outside IR35 would form their own limited company and pay themselves via the dividend method. If your contract is inside IR35 and therefore subject to deemed employment, you can operate your payments through your clients PAYE even though this is not the most efficient method. Whatever your status, there are alternatives and you may still be able to increase your net income.
Do I fall Inside or
Outside IR35?
Check now by completing our quick questionnaire
For more information on IR35 visit our
IR35 Advice website
Key Factors
If you can answer ‘yes’ to the following questions you could be inside IR35:
- Does your client have the right to control how you perform your services, what tasks have to be carried out, when and where they must be performed?
- Are you obliged to accept work and is your client obliged to supply work?
- Are you committed to fulfilling your contract personally?
- Are you committed to working for just one client?
If you can answer ‘yes’ to the following questions you could be deemed outside IR35:
- Can you (with written permission from your client) assign someone else to carry out your duties?
- Are you in business on your own account and are you responsible for the success or failure of that business?
While these are important factors exceptions do occur and your working practice needs to be considered carefully to ensure it reflects your contract. For your own peace of mind you should have your individual circumstances and contract checked by IR35 experts. Even if your current contract is outside IR35, you should have an understanding of the legislation because your next contract may not be.
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