What is IR35 in the UK, exactly? IR35 rules can be complex, so it’s important that contractors are clued up.
And what do the self-employed need to know about the high-profile IR35 changes introduced in April 2021? Here’s our guide.
IR35 is another name for the off-payroll working rules. The term ‘IR35’ refers to the press release that originally announced the legislation in 1999.
Self-employed IR35 rules are designed to work out whether a contractor is someone who’s genuinely self-employed rather than a ‘disguised’ employee, for the purposes of paying tax.
That’s because contractors who set up and work through a limited company enjoy some 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 try to take advantage of this tax efficiency by appearing self-employed on the surface, when they’d actually be an employee were they not providing their services through their limited company. The off-payroll working rules are designed to tackle this, but they aren’t without their problems.
When a contractor is a ‘disguised’ employee, they’re taking advantage of the tax efficiency of working through a limited company, but otherwise they should be classed as an employee.
Consider the example of an employee who quits their job, leaves on the Friday and starts back at the company in the same position on the Monday, but as a contractor working through their limited company. Has the arrangement changed in any material way?
‘Disguised’ arrangements benefit employers too, because they don’t have to pay employers’ National Insurance contributions (NICs) or give any employee benefits to contractors.
So self-employed IR35 rules tackle those arrangements by testing the contract itself, working out whether it’s ‘inside IR35’ or ‘outside IR35’:
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.
Many find the legislation complicated to understand. Even HMRC seems to struggle, as 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.
This lack of clarity, along with ambiguity over employment status guidelines (including available employment rights if contractors are found inside IR35), is 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).
If you work on multiple contracts, it’s possible that some fall within off-payroll working rules and some don’t. This is because these rules are based on each contract.
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.
But in reality, IR35 status hinges on IR35 case law and employment legislation, itself reliant on decades worth of employment tests heard in UK courts.
If you contract with a public authority, they’re responsible for working out whether you fall inside or outside of IR35. If you fall inside, the hirer, agency or other third party who pays you then needs to deduct tax and NICs and report them to HMRC.
Off-payroll working rules in the private sector changed in April 2021.
If you contract with larger businesses, they’re responsible for working out your IR35 status. As above, the party who pays you then needs to deduct tax and NICs.
Smaller businesses are exempt, which means it remains your responsibility to determine your IR35 status when working for them.
End clients are classed as small businesses if they meet two of the following criteria, for two consecutive financial years:
After a delay, private sector IR35 changes were introduced in April 2021. These changes introduced public sector rules to the private sector, shifting responsibility for working out IR35 status from the contractor to the client.
April 2021’s IR35 changes mean that:
End clients in both the private and public sector need to show they’ve taken reasonable care when working out IR35 status. If they haven’t, HMRC holds them responsible for getting things wrong. They also need to keep records relating to employment status determinations, including how they’ve made their decisions.
While it’s important to know if you’re IR35 compliant, from 6 April 2024 it will be down to large and medium-sized businesses to determine a contractor’s employment status.
This new shift in responsibility hopes to ensure fairer tax treatment for contractors and prevent tax avoidance by larger businesses.
If a contracted worker is thought to be inside IR35, the hiring company will then need to deduct income tax and National Insurance contributions before paying the contractor. This change could apply to any IR35 errors dating back to April 2017.
For employers, these changes create more clarity surrounding IR35, providing clearer guidelines and reducing the risk of non-compliance. This can help to avoid penalties and legal issues surrounding the misclassification of contractors.
For freelancers and contractors, the changes mean more consistent tax treatment. And with a recent Financial Times study revealing that nearly half of contractors believe they’ve been “wrongly classified as employed for tax purposes” since the April 2021 changes, this new update should be a welcome change.
The IR35 checklist below can help you get IR35 compliant. Check out our IR35 support hub for more guides and resources.
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:
Tax legal protection covers costs and expenses for employer compliance disputes, including anything concerning IR35 legislation and regulations.
If you have legal expenses insurance as part of your Simply Business policy, you have access to a number of useful services through DAS Businesslaw (you’ll just need your voucher code found in your policy documents to register).
DAS has a legal advice helpline, available whether you’re facing a serious legal issue or just want to check something with an adviser. They also offer a range of legal templates and guides to help you with tax and contracts.
Over the years we’ve reported on the often confusing rules, reviews, and U-turns when it comes to IR35. Here’s a round-up of IR35 news and changes:
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Do you find the IR35 rules too complex? Let us know about your experiences with IR35 in the comments below.
Sam has more than 10 years of experience in writing for financial services. He specialises in illuminating complicated topics, from IR35 to ISAs, and identifying emerging trends that audiences want to know about. Sam spent five years at Simply Business, where he was Senior Copywriter.
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