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What does being inside IR35 mean? A guide for the self-employed

3-minute read

What does being inside IR35 mean? A guide for the self-employed
Sam Bromley

Sam Bromley

20 January 2020

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Being inside IR35 means your contract falls in the off-payroll working rules and HMRC sees you as an employee for tax purposes.

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Here’s what you need to know about being inside IR35. You can also find out more about IR35 in general by reading our guide: what is IR35?

What does inside IR35 mean?

HMRC introduced the off-payroll working rules (IR35) in 2000 to make sure that contractors who would be employees if there was no intermediary pay broadly the same tax as employees.

That means that if a contract is inside IR35, you have to pay income tax and National Insurance Contributions just like employees do.

If a contract is outside IR35 it means you’re operating as a proper business. HMRC sees you as self-employed and you’re able to pay yourself in a tax-efficient way.

Who determines whether I’m inside IR35?

The rules are different depending on whether your client is in the public or private sector.

Public sector contractors – your end client is responsible for determining your IR35 status. That means they’ll use HMRC’s check employment status for tax tool (CEST), or an independent service, to work it out.

Private sector contractors – you’re responsible for determining your IR35 status. But this is set to change from April 2020, when medium-sized and larger clients will be responsible for determining your IR35 status (smaller companies are exempt from the change).

How do I know whether I’m inside IR35?

One way to work out whether a contract falls inside IR35 or outside IR35 is by using HMRC’s check employment status for tax tool.

To use the tool HMRC says you need:

  • details of the contract
  • the worker’s responsibilities
  • who decides what work needs doing
  • who decides when, where and how the work is done
  • how the worker will be paid
  • if the engagement includes any corporate benefits or reimbursement for expenses

What about Mutuality of Obligation (MOO)?

HMRC's tool assumes there’s a contract in place, but it doesn’t take Mutuality of Obligation (MOO) into account. Mutuality of Obligation refers to the employer’s obligation to provide and pay for work and the contractor’s obligation to complete the work.

The fact that CEST doesn’t take this key piece of case law into account is controversial. It’s been the deciding factor in a number of IR35 tribunals, which is just one reason it’s important to get independent advice too. There are lots of accountants who offer independent IR35 contract review services.

Does CEST give accurate results?

For its part, HMRC says CEST is accurate and it “will stand by the results, provided the information input is accurate and it is used in accordance with our guidance.”

HMRC can open an investigation into your IR35 status if it thinks an outside IR35 determination is wrong, so it’s important to keep accurate financial records and tax return information. Make sure you have IR35 compliance in mind and you actively discuss your status with your client.

Our IR35 guide has more information on some of the tests HMRC might carry out to determine whether your contract is inside IR35 or outside IR35. See the section IR35 checklist: am I compliant?

The off-payroll working rules are complex. Please only use this article as a guide and if you’re unsure about whether a contract falls inside IR35 or outside IR35, get professional advice.

Inside IR35 vs outside IR35 comparison

Your IR35 status has different implications for the tax you pay.

When you’re inside IR35 you:

  • are classed as an employee for tax purposes
  • need to pay income tax and National Insurance Contributions
  • pay this tax by making a ‘deemed payment’ at the end of the tax year

Working out your deemed payment can be complex, so it’s best to speak to your accountant to make sure you get it right.

But if you’re a public sector contractor, your fee payer will work out and pay your tax and NICs on your behalf (as will medium-sized and larger clients for private sector contractors from April 2020).

Even though HMRC sees you as an employee for tax purposes when you’re inside IR35, you aren’t entitled to employee benefits like holiday pay and sick pay.

When you’re outside IR35 you:

  • are self-employed and operate as a proper business
  • are responsible for your business’s taxes
  • can pay yourself in a tax-efficient way

If you’re outside IR35 you’ll be paid your fee and will be responsible for managing your business’s taxes as normal.

Should I avoid inside IR35 contracts?

You can continue to run your limited company even when a contract is inside IR35. As mentioned, it means you need to make a ‘deemed payment’ to HMRC for the contracts caught inside the rules.

So it’s perfectly possible for professional contractors to have a mix of contracts both inside and outside of IR35 – but it means you’ll need to be organised and ask for professional advice, if you need it.

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