What is IR35 and what does it mean for contractors?
If you're a contractor - or thinking about becoming one - and a UK tax resident, IR35 is something that you need to be familiar with.
It's a set of tax rules that determines the employment status and tax liability of self-employed workers or contractors when they provide services to a client through an intermediary, such as a limited company.
Why does it matter?
Working as a contractor is often more tax-efficient (for both parties) than working as an employee of a company, and many contractors who are operating in the same way as employees are - intentionally or otherwise - gaining a tax advantage over others working in the same way as them.
IR35 seeks to level the playing field, so understanding what determines your employment status - whether you’re ‘inside’ or ‘outside’ IR35 - really matters.
What does it mean to be inside IR35?
If you’re working ‘inside IR35’, you’re liable to pay the same tax and National Insurance Contributions (NICs) as a regular employee. This is by no means an exhaustive, but here are some factors that may indicate you’re operating inside IR35:
You personally carry out all of the work that the company is contracted for.
You’re paid on a time basis.
You’re closely supervised by the client.
You work long-term for one client.
You’re supplied with appropriate equipment by the client and/or work at their premises.
You are eligible for employee benefits, such as paid leave or sick pay.
What does it mean to be outside IR35?
If you’re working ‘outside IR35’, you’re operating legitimately as an independent contractor (and therefore outside IR35 rules). In such cases, you’re not subject to PAYE but you are responsible for paying the correct tax and NICs on what you earn from your work. Here are some factors that may indicate you’re operating outside IR35:
Control - you have the right to decide when and how you work.
Substitution - you have the right to substitute or delegate work.
Exclusivity - you work with more than one client at one time.
Financial Risk - rejected work is to be corrected at your own cost.
You’re are neither supplied with equipment by the client nor work at their premises.
You are not eligible to receive employee benefits, such as paid leave or sick pay.
Who is liable for IR35?
Since April 2021, it’s the client’s responsibility for determining their contractors’ IR35 status, paying the correct income tax and NICs where it’s decided the contractor is operating inside IR35.
Contractors are now only responsible for determining their own status if they work for a client that’s classed as a small business.
References
Disclaimer
This is post is intended for general information purposes only and does not constitute legal advice. Specialist legal advice should be taken in relation to specific circumstances.
At Retail Management Consultants, we make great things happen for forward-thinking retail organisations.
We see the immense connectivity of the modern world and are hell-bent on enabling our clients to seize the opportunities it presents.
Let's talk. Let's make it great.
Subscribe now
