IR35 Advice and Compliance: What Every Contractor Needs to Know

Understanding IR35 legislation is a crucial aspect of operating as a successful contractor or freelancer in the UK. IR35 is, of course, nothing new! It became law almost a quarter of a century ago and there have been various revisions (and revoked revisions!) since then.

Changes to the legislation make it harder for contractors and freelancers to keep-up-to-date with the latest rules and requirements which further increases the challenges of understanding it and ensuring compliance.

IR35 has certainly had a significant impact on self-employed people and the way in which they engage with their clients. The nature of the contractor-client working relationship dictates the IR35 status of each contract which will be one of two options: inside IR35 or outside IR35.

Working outside of IR35 is the dream scenario for reasons which we’ll explore further in this post. But let’s start at the beginning…

What is IR35?

IR35 is tax legislation which aims to tackle tax avoidance and reduce the tax gap in both the private sector and public sector. Also known as ‘intermediary legislation’ and ‘off-payroll tax’, IR35 applies to contractors and freelancers operating through their own limited companies and it aims to stop employers from engaging with genuine employees on a contract basis, known as ‘disguised employment’.

If an employer were to engage an employee on a contract basis they would avoid paying Employer’s National Insurance Contributions and providing employment benefits such as sick pay, pensions, maternity leave and holidays which results in significant economic losses for HMRC and employees not receiving the entitlements they deserve.

So the aim of IR35 is to eradicate disguised employment by drawing a clear distinction between disguised employees who operate in the manner of a genuine employee but benefit from the tax advantages of being self-employed, and those that are a genuine business with a self-employed contractor operating through their own limited company.

How do you know if you’re Outside IR35?

Being outside of IR35 is the best situation for contractors and freelancers. The responsibility of determining your IR35 status usually lies with the client rather than yourself, but it’s important to understand how IR35 status is determined so that you can be confident that you’re classified correctly and don’t miss out on the benefits of being outside IR35.

Ultimately if you work through and are paid by your own limited company the likelihood is that you are outside IR35. A gross amount will be paid to your business by your client for your services and you then have the freedom to structure your income how you see fit, as well as the responsibility for meeting your tax and reporting obligations.

You can use HMRC’s Check Employment Status for Tax (CEST) tool to get their view on your IR35 status but there are several factors to consider when determining the nature of a contract.

Control

If your client doesn’t have direct control and supervision over the service you provide them and how you deliver it and doesn’t provide the equipment you need to do so, this is an indicator that the contract is outside IR35. If they have a level of control in terms of the hours you work, the location you work from as well as influencing or controlling how the service is delivered, the contract will likely be inside IR35.

The Right of Substitution

Should you be unable to work on a contract, due to illness for example, but you can provide a substitute such as an employee of your business to work on it in your place, that indicates an outside IR35 contract. If you don’t have the right to provide a substitute to work on the contract in your place, this points to there being a contract of employment and HMRC would consider it to be inside IR35.

Mutuality of Obligation

Once a contract is completed, there should be no expectation of any further work to be done by either party in which case the contract is likely to be outside IR35. All contracts have start and end dates and If mutuality of obligation – the expectation of further work – exists after the contract completion date, then you are likely to be inside IR35.

Financial Risk

If you are genuinely outside IR35 you have responsibility for the financial risk should there be errors or omissions in your work rather than the responsibility being with the client. It’s a good idea to take out appropriate Contractors Insurance to protect yourself and your business in this respect, or if you were unable to work.

How You Are Paid

If you receive a fixed amount for completion of a project rather than receiving a salary, this is an indicator that you’re outside IR35. It’s also likely that you’ll receive payments from multiple clients over time rather than just one.

What are the Indicators that you’re Working Inside IR35?

If your responsibilities are the same as a permanent employee, and you are managed like one it’s likely that you are an employee of the client and therefore inside IR35. You would also pay your income tax and National Insurance Contributions though Pay As You Earn (PAYE) like a regular employee.

Who Determines your IR35 Status?

From April 2021 the responsibility for determining the IR35 status of a contract usually lies with the end client or employment agency if they are defined as a medium or large company. The situation is different if the end client or employment agency is defined as a small business. As per the Companies Act 2006, it’s a small business if any 2 or more of the below criteria are met:

• Annual turnover is £10.2m or less
• Balance sheet total is £5.1m or less
• 50 employees or less

The responsibility for determining IR35 status is with the contractor if they are engaging with a small business which is why it’s important to understand the IR35 rules. When the end client determines IR35 status they must make the contractor aware of their decision and provide a Status Determination Statement.

When negotiating with medium and large businesses it’s important for contractors to make clear that they are genuinely self-employed including factors such as the level of control they have, the right of substitution and the financial risk they face so that the correct outside IR35 determination can be made.

What are the Benefits of being Outside of IR35?

There are various advantages for contractors working outside of IR35.

Tax-Efficiency

A key benefit of being self-employed working through your own limited company and outside IR35 is the opportunity to take advantage of greater tax-efficiency. By structuring your remuneration through a combination of a small salary and dividends, your overall tax liability can be reduced whilst still remaining compliant which results in an increase in take home pay.

Full Control and Flexibility

As well as having control over how you pay yourself, you also have control in terms of the work you do and how you do it. This includes choosing the type of work that you do, who you do it for, managing your workload, deciding the hours you work and where you work from. This enables contractors outside of IR35 to find the work/life balance that’s right for them and their circumstances

High Earning Potential

Contractors working outside IR35 are generally well paid, and the added scope to optimise your tax position helps in this regard. Unlike those inside IR35 on fixed salaries, when you’re self-employed you can set your rates and negotiate your contracts to maximise your earnings and the more work you do, the more you earn.

Variety and Opportunity

Being self-employed outside of IR35 means you can choose to work for a range of clients and on diverse projects which helps to mitigate risk. Having this variety also keeps your work interesting and offers the opportunity for professional development as you can increase your knowledge and skills while working in a sector that you are passionate about.

Working with Gorilla

Operating outside of IR35 gives limited company contractors a great foundation and opportunity to propser, learn, diversify and build a rewarding career. And one of the best decisions you can make is to work with a contractor accountant. Gorilla have years of experience working with self-employed contractors across a diverse range of sectors helping their businesses to thrive.

With Gorilla you’ll work with your own dedicated accountant who will ensure that all your business and personal accounting needs are expertly handled so you can focus on your work while we take care of your accounting.

Your dedicated accountant will always be on hand to provide unlimited support and advice including on how to optimise your tax-efficiency so you can take full advantage of the tax planning opportunities presented by being an outside IR35 contractor.

With our limited company accounting package, you also receive inclusive full access market-leading FreeAgent accounting software and a guaranteed same working day response to your queries thanks to our Client Service Guarantee.

We understand that it’s not always easy to determine the IR35 status of your contracts which is why we’ve partnered with industry experts Qdos to provide expert contract reviews. If you have any queries about IR35 and would like advice from an accountant, or if you’d like to know more about our limited company accounting service, please call 0330 024 0406 or request a callback here.