We understand that IR35 determinations can be confusing, so we’ve made things that little bit easier by creating this useful blog which covers everything you need to know about IR35 for contractors, including what it is and what it means to be Inside or Outside IR35.
First things first – what’s the deal with IR35?
IR35 - also known as ‘Intermediary Legislation’ or ‘Off Payroll Tax’ - was introduced in April 2000 in order to combat tax avoidance through the misuse of personal service companies (PSCs).
The IR35 legislation is designed to ensure that contractors operating through limited companies (but working like employees) pay broadly the same amount of tax as they would if they were employed. Working as a contractor is often more tax efficient than working as an employee of a company (and could leave you a few extra pounds in your pocket!), so the government is using IR35 to remove what is deemed an unfair advantage, and at the same time increase its overall tax revenue.
The government made IR35 changes to the public sector in 2017 and reformed the legislation for the private sector in April 2021, resulting in the responsibility of IR35 determinations being placed with the end client.
When undertaking an IR35 assessment, there are two classifications: inside of IR35 or outside of IR35.
What is inside of IR35?
To be operating 'inside IR35' means that you must pay the same tax as a permanent employee.
What is outside of IR35?
To be operating as a genuine business, and therefore operating outside of the IR35 rules. If you are operating outside of IR35, you must ensure that you are paying the correct amount of tax in order to avoid fines from HMRC.
What is the criteria for being classed as Inside of IR35?
You are deemed Inside of IR35 if:
- The end client’s IR35 assessment states that IR35 applies to your assignment – in this case, you will be given a Status Determination Statement (SDS) which is a written confirmation of your employment status following the assessment
- It’s established that you would be employed by the end-client or agency as an employee if it wasn’t for your Limited Company
- The service you provide reflects a ‘service of employment’ rather than ‘self-employment’. For example, if you are under a service of employment, then your employer is in charge of your workload, and you are required to regularly work unless you’re on leave.
And what about Outside of IR35?
You are deemed Outside of IR35 if:
- You are operating as a genuine business
- You have received an ‘Outside of IR35’ SDS by your end client
- Following consideration of the agency to client contract, your contract and your working conditions, your SDS assessment still shows as outside of IR35
- You are not being placed under supervision, direction and control on your assignment (in simple terms, you don’t have anyone overseeing your work, providing you with instructions or advice, checking that your work is of a certain standard or even placing you on another job!)
- Mutuality of obligation does not exist (put simply, the client does not hold the responsibility of providing you paid work, and you are not obliged to accept and complete the work)
- There is no requirement for a Personal Service Company, and you carry out the work by yourself
- There is no indication that you are part and parcel of the client’s organisation (in other words, you do not play an integral role within a client’s business)
So, what does this mean for me?
If you are placed Inside of IR35, you:
- Are required to pay National Insurance Contributions (NICs) and Income Tax on your earnings
- May be liable to make a ‘deemed payment’ to HMRC at the end of the tax year and therefore may require professional support in doing so due to the complexity of the calculation.
A deemed payment is a payment which is made to HMRC when you are operating inside of IR35, to account for the extra tax and national insurance which is due on an assignment where the IR35 legislation applies (Qdos Contractor).
You are liable to make a deemed payment if you are engaged by a small private sector client.
You are not liable to make a deemed payment if you work in the public sector or work inside the rules for medium and large companies in the private sector (your fee payer will work this out on your behalf and deduct the NICs and Income Tax from your invoice before paying you).
- Are required to pay tax at the same rate as an employee (as you are considered an employee for tax purposes)
- It’s important to note that although you will pay tax at the same rate as employees, you are not automatically entitled to employment rights as tax and employment legislation are separate from one another
If you are placed Outside of IR35, you are responsible for:
- Ensuring all your personal and company taxes are calculated correctly
- Making sure that your taxes are paid on time, in line with any deadlines. For example, completing a Self-Assessment tax return by the required annual deadlines. Read more on how to submit a Self-Assessment tax return