What is IR35, exactly, and why is it important that contractors are clued up? With new IR35 rules being introduced in April 2021, here’s our guide for the self-employed.
IR35 is another name for the off-payroll working rules. It’s designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax.
Contractors who work through their limited company enjoy a level of tax efficiency. While they don’t usually get employee benefits (like holiday and sick pay), they have flexibility and control over their work.
Some contractors and their clients try to take advantage of this tax efficiency by working as if they’re self-employed, when for all intents and purposes they’re employees. HMRC has designed the off-payroll working rules to tackle this – but the rules aren’t without their problems.
IR35’s nuances mean that contractors can’t be expected to know the law inside out. Please only use this article as a guide – if you’re unsure about anything, seek professional advice.
Download your free in-depth guide on what contractors and freelancers should know about IR35 rules.
HMRC introduced IR35 (or the ‘off-payroll working rules’) in 2000 to tackle what it calls ‘disguised’ employment.
When a contractor is a ‘disguised’ employee, they might be taking advantage of the tax efficiency of working through a limited company, when they’d really be an employee were they not working through their company.
The benefit for employers is that they don’t have to pay employers’ National Insurance contributions or give contractors employee benefits. The benefit for contractors is that they can pay themselves tax efficiently.
So IR35 is essentially an employment status test for tax, which works out whether a contract points towards employment or self-employment:
Many find the legislation complicated to understand. Even HMRC seems to struggle – its record on fighting IR35 cases at tribunal is patchy.
In 2019, TV presenters Kaye Adams and Lorraine Kelly successfully challenged HMRC in separate cases, proving that they weren’t inside the rules.
A lack of clarity, along with ambiguity over employment status guidelines (including available employment rights if contractors are found inside IR35), has been controversial.
HMRC says that when working out whether IR35 applies to a contract or engagement, “you must work out the employment status of the person providing their services.”
HMRC goes on to say that the off-payroll rules apply if the contractor “would be an employee if there was no intermediary”. The intermediary in many cases is the contractor’s limited company (often called a personal service company).
IR35 is also known as the ‘intermediaries legislation’ because it applies to workers who provide their services through an intermediary, rather than working as an employee.
As mentioned, the intermediary will often be the contractor’s own limited company, or personal service company.
A personal service company is a limited company where the sole director, the contractor, owns most or all of the shares. The contractor then delivers services to clients.
But gov.uk says that there can be other intermediaries:
A contractor can provide their services directly to clients through their intermediary, or they might work through an agency or umbrella company.
IR35 status tests usually relate to supervision, direction and control. We go into more detail as part of our IR35 checklist below.
HMRC also has a tool called CEST (check employment status for tax) you can use to check whether IR35 applies to a contract, plus an IR35 helpline.
In reality, IR35 status hinges on IR35 case law and employment legislation, itself reliant on decades worth of employment tests heard in UK courts.
There are currently different rules for public sector and private sector contracts.
This is set to change from April 2021.
Private sector IR35 reform is set for April 2021, when the public sector off-payroll working rules will be applied to the private sector.
This was meant to happen in April 2020, but it was delayed by a year because of coronavirus.
The upcoming IR35 changes mean that:
End clients are classed as small businesses if they meet two of the following criteria, for two consecutive financial years:
End clients need to show they’ve taken reasonable care when working out IR35 status. If they haven’t, HMRC will hold them responsible for getting things wrong.
Businesses and contractors should prepare for the 2021 IR35 changes. This might involve speaking to your current clients about your contracts, as well as understanding which clients count as small businesses.
The IR35 checklist below can help you get IR35 compliant.
In general, IR35 won’t apply if the contract is for services rather than employment. To untangle that, you should see whether the contract specifically mentions these principles:
The contract has to reflect your actual working practices – essentially, the clauses need to be genuine.
For a contract to fall outside IR35, contractors should have freedom over how they complete their work.
For a contract to fall outside IR35, you should be able to send a substitute to complete the work instead.
This is an important clause in a contract, as it’s a key test when working out self-employed status. If the client is obliged to offer work (and pay you) and you’re obliged to take it, this demonstrates a contract of employment.
There’s more criteria to consider when working out IR35 status:
Make sure you clarify your relationship with the hirer before you start the contract by considering all of these principles.
Again, before you start working, you should seek expert IR35 advice.
Contractors should think about a comprehensive business insurance policy, including:
Do you find the IR35 rules too complex? Let us know about your experiences with IR35 in the comments below.
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
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