IR35 tax rules were introduced to reduce the risk of tax avoidance caused by someone working through their own company, when they would otherwise be considered an employee if the company didn’t exist. In this article we take a look at what it means to be inside IR35, and what you need to do next. You can also find more guides and templates in our resource centre for contractors.

What is IR35?

The IR35 rules (sometimes called ‘off-payroll working rules’) deal with how contractors should pay tax when they operate through an intermediary (usually their own limited company), if they would simply work for their client as a regular employee if the intermediary didn’t exist.

The easiest way to understand IR35 is to look at how employees pay tax compared to how self-employed people pay tax.

Which organisations are affected by IR35?

There’s an important point to note before you start worrying about IR35, and it’s that the regulations don’t apply to clients classed as small businesses. A small business is one which has:

• An annual turnover of less than £10.2 million
• A balance sheet total of less than £5.1 million
• Fewer than 50 employees on average in an accounting year

So, if the business you are contracting with ticks those boxes, then you are clear of IR35. This applies to the whole group though, so if you contract with a small subsidiary of a larger group then you can’t get out of IR35.

Although we are talking primarily about limited companies in the above, the same goes for other types of organisations such as partnerships, charities, and public services.
 

How does IR35 change my tax status?

In the normal course of business, a limited company does work for a client and then sends an invoice for this. The client pays, and the company accounts for its tax at the end of the financial year.

This is what is generally called an ‘outside’ IR35 contract. As the contractor working through a limited company, you might choose to pay yourself a salary through payroll, take dividends, or a combination of the two.

Where a worker would normally just be the client’s employee, but instead they’re working through their own company, the contract is judged to be ‘inside’ or ‘caught by’ IR35, and the position is different.

What happens if I’m inside IR35?

There are generally two options here. You could be taken on as an employee with fixed-term contract and pay PAYE in the normal way. If not, the client will need to deduct income tax and employee National Insurance Contributions (NICs) as if you were an employee, and pay them over to HMRC on your behalf along with an employer’s contribution. Just like an employer would.

How do I know if I’m ‘caught’ by IR35?

Known as a ‘determination’, this is a formal way of recording the thought process that goes into assessing your tax status. Most clients will assess the role before advertising it, so you’ll often see ads stating whether it’s inside or outside IR35. It’s normally the clients’ responsibility to confirm your IR35 status, but not always!

However, some of the tests relate to the individual. Even though a role might initially look like it is outside IR35, there may be circumstances which change the determination – for example, if you already work for them.

The client must give you a copy showing what the determination is, and how they arrived at it.

What are the IR35 tests?

This is a tricky area! The problem is contracting is very diverse, so a reasonable test for one company doesn’t work so well with another organisation. The issue is so complex that HMRC regularly loses tribunals based on their own rules! However, there are some tests which give a good general indication, such as those below.

The contract

Working practices

 
Some of these tests are simple and easy to evidence. For example, if you have business stationery printed, maintain your own website, or spend money on advertising for work then that would be business-like.

There’s an over-arching rule we like to apply here, and it is the duck rule. In other words, if it looks like a duck, walks like a duck, and quacks like a duck – then it probably is a duck!

• If your contract looks like an employment contract
• And you are acting like an employee
• And your client is treating you like an employee
• Then you are probably an employee and should be taxed within IR35.

Of course, the main problem is this isn’t an exact science, as proven by the fact HMRC has an unenviable record of losing tribunal cases and appeals. The main message here is the importance of taking advice, even if you think you’re sure.

Can you appeal against an IR35 determination?

Yes, you have the right to appeal once you have the determination. Unfortunately, some clients will take a ‘blanket’ approach, even though they’re not supposed to, and treat all their contractors as though they are within IR35. This is a breach of the rules, but some contractors might simply agree to this arrangement in order to secure the job.

 
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