IR35 is something that often comes up in discussions about contractor accounts and taxation. But what exactly is it and what does it mean for you? This article aims to give a straightforward definition of what IR35 is and what it’s designed to achieve.
A simple definition of IR35
IR35 is a part of the 2000 Finance Act that’s designed to prevent tax avoidance in certain circumstances. Specifically, it relates to people who perform the same functions as a business’s employees, but pay less tax by operating as self-employed contractors through a limited company.
So, if you left your job and then went back to the same company the following week and performed the exact same role but as a self-employed contractor via an intermediary limited company, IR35 legislates that you would pay more-or-less the same tax and NICs as regular employees of the business.
How does IR35 work in real terms?
Specifically, IR35 stops you from avoiding being taxed as an employee and paying Class 1 NICs if you are, in fact, operating as a ‘disguised employee’. Before its introduction, the business you worked for would pay your limited company, and then you would draw out the payment in the form of dividends.
But now, if you are operating as a ‘disguised employee’ and you fall under IR35, you would have to be payed as an employee and therefore would pay roughly the same tax and NICs as other employees.
How do I know if I am within IR35 or not?
Generally speaking, you are inside IR35 (a ‘disguised employee’) if most of the following applies:
- You have to do the work yourself and can’t employ anyone else to do it on your behalf.
- You have your working hours dictated to you by someone else.
- Someone else can tell you what tasks you should be working on at any given time or where you should be working and how.
- You are paid monthly, weekly or hourly.
- You are eligible for overtime pay.
- You are eligible for a bonus.
You would usually be considered outside IR35 (a self-employed person) if most of the following applies:
- You can hire another person at your own expense to do the work for you.
- You risk your own money.
- You provide your own equipment — including the main equipment needed to carry out your work.
- You control how, when and where you carry out your work.
- You carry out the work for a fixed fee regardless of time spent.
- You work for several different clients.
- You have to make fixes and amends to your work (if unsatisfactory) at your own expense.
Hopefully from these checklists, you can get an idea of whether you fall in or out of IR35, but we will be following up this blog soon with another which will give tips on how to make sure you’re complying with IR35.
If you’re a contractor and you’d like to get some advice on your insurance needs (some of which can be an IR35 indicator to HMRC) you can call our helpful team on 01242 808740. Alternatively, you can find more info on our website or get in touch via Facebook, Twitter or LinkedIn.