Complete IR35 guide

As a contractor, understanding IR35 and whether you fall inside or outside can be a challenge. There’s lots of information surrounding the legislation, its technicalities and how it could affect your limited company.

We’re here to help you unravel the mystery of IR35. Our comprehensive guide covers all you need to know, from the basics, its details and what it could mean for you as a contractor.

IR35 Test vs Business Entity Test

What is IR35?: why was the legislation introduced and what does it mean.
How is your IR35 status determined?: the factors used to assess your status.
What to do if you’re inside IR35: working tax efficiently and what it means for you.

What is IR35?

IR35 is a piece of anti-avoidance legislation (aimed at preventing tax avoidance) targeting Personal Service Companies (PSCs) which was established by the government to combat “disguised employment”.

The legislation poses the hypothetical question: in the absence of the intermediary (limited company) would the underlying relationship be one of employment?

So, if your contract has the same level of risk, responsibility, liability and control as a permanent employee, you would be classed as inside IR35. In this instance, the income from the assignment will be treated as an employment income for tax purposes.

What does IR35 mean for me?

IR35 can affect the way you operate your business. If your contract is found to be inside IR35, you will not be able to benefit from the same tax efficiencies than you otherwise would.

However, there are still ways in which you may be able to operate to make the most of your money.

Why has IR35 moved into the private sector?

In April 2017, the off-payroll working rules were implemented in the public sector which meant that the responsibility for determining IR35 status of an assignment shifted from the contractor to the engager or the end hirer. Under these rules, if the contract is deemed to be inside IR35, the ‘fee payer’ is responsible for deducting National Insurance and PAYE income tax from the contractor’s pay and for paying employer’s National Insurance contributions.

In the 2022 Budget, the Chancellor announced that the off-payroll rules would extend to the private sector for medium and large-sized businesses. As with the public sector reforms, in businesses where the contract falls inside IR35, the fee payer (this will usually be the agency or the end client) will be responsible for deducting tax and National Insurance contributions.

The off-payroll working reforms were initially intended to take effect on 6th April 2020, however, they have been deferred until 6th April 2021 in response to the COVID-19 crisis.

How is your IR35 status determined?

HMRC’s complex test considers a number of factors when looking at your contract, including:

Control: how much control does your client have over your working conditions?
Substitution: do you have a replacement to undertake your work in the event that you cannot fulfil your duties?
Mutuality of Obligation: are you required to complete a specific task or is their scope for your client to ask you to perform additional duties?

There are other factors to consider, for example, the degree of financial risk and ‘in business factors’ and it is important to note that IR35 is not a tick box exercise: a holistic view of the working relationship is needed.

Who will be affected by the IR35 private sector reforms?

HMRC announced in their policy paper that they expect 3 groups of people to be impacted by the IR35 reforms:

Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly.
Medium and large-sized organisations outside the public sector that engage with individuals through PSCs. Public sector organisations will also be affected by changes to improve the operation of the reform.
Recruitment agencies and other intermediaries supplying staff through PSCs.

Unlike the public sector reforms, there is set to be an exemption for small companies in the private sector: If a company meets the criteria for a small company, they will not be impacted by the reforms. The contractor will continue to assess the IR35 status of their assignment and carry the liability. A small company is defined as one which has two or more of the following requirements by Companies House:

A turnover of less than £10.2 million
A balance sheet total of less than £6.1 million
Less than 50 employees

How can I protect my IR35 status?

The best way of protecting your IR35 status is to undertake a comprehensive IR35 contract review. During this review, an expert will assess your working conditions and your contract to make an informed decision about how likely it is that your contract will fall inside or outside of IR35. Depending on this decision, they will be able to offer advice to help you restructure your working practices and reduce the chances of falling inside.