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IR35 Hub for Contractors

Understanding IR35 is essential for contractors managing tax and national insurance obligations. IR35, or the Intermediaries Legislation, distinguishes between employed and self-employed individuals, impacting tax treatment. If deemed “inside IR35,” you’re taxed as an employee, while “outside IR35” offers tax flexibility. Determining status involves factors like control and substitution rights.

Our FAQ provides insights and strategies for navigating IR35 in private and public sectors, ensuring contractors can make informed decisions

IR35 WHAT YOU NEED TO KNOW

What is IR35?

IR35, the Intermediaries Legislation, is concerned with your employment status (employed or self-employed) for tax and national insurance. It’s designed to prevent “disguised employees” from obtaining a tax advantage by operating through a limited company. If caught by the legislation or “inside IR35, “you’re treated as “employed for tax purposes, “meaning you must pay PAYE tax and NICs on your contract rate.

If the legislation does not catch you or you’re “outside IR35”, you can determine your salary and dividend strategy to suit your tax-planning aims. You’ll usually pay less tax and take home more of your money.

Inside IR35 Outside IR35
You’re deemed to be “employed for tax purposes” You’re deemed to be in business on your own account
Tax and NI paid in line with employment levels Free to account for your own tax and NI on your income through your limited company
Travel and subsistence expenses are not allowed Travel and subsistence expenses can be claimed

The real question is, are you genuinely in business on your account, or are you a “disguised employee”? It should be simple, but with no statutory definition of employment or self-employment, IR35 status must be reviewed against case law and precedent. Your IR35 status can vary between contracts, and both the details of your agreement and your actual working practices must be taken into account, so correctly determining your IR35 status is not a simple matter. That’s why we recommend that anyone contracting through a limited company get a professional status review from an IR35 specialist for each new contract.

There are many things to consider, and this is not an exhaustive list, but here are some common factors that can affect your IR35 status:

  • Control – do you decide when, where and how you undertake the work?
  • Right of substitution – are you required to complete the work personally, or could you provide a suitable substitute?
  • Mutuality of obligation – does the client have a responsibility to offer you more work, and if they do, are you obligated to accept it?
  • Financial risk – how much is yours, and how much lies with the client?
  • Basis of payment – are you paid by the job or the hour?
  • Multiple clients – do you have several clients or work exclusively for just one?
  • Part and parcel – to what extent are you part of the client’s organisation; do you attend staff meetings, social events or training? Do you use staff facilities or receive staff benefits?

If your client is classified as a small private company or entirely based overseas, you are responsible for assessing your IR35 status.

If your client is a public-sector body or a large or medium private-sector company, the responsibility for assessing IR35 lies with them. If you’re inside IR35, the fee payer (usually a recruitment agency) is responsible for making the correct PAYE tax and National Insurance contributions deductions.

In either case, it’s vital that you know what your correct status is and that you understand why. Even if you’re not making the decision yourself, we’d still recommend getting a professional IR35 review and discussing your status with your client. Remember, they’re not IR35 specialists and will likely need your input to help them make the right decision.

In 2017, HMRC launched an online tool to help assess IR35 status. It was aimed at public-sector bodies, who had just been made responsible for assessments, but any stakeholders can use it. Unfortunately, many believe it needs to be more fit for purpose, and it’s been widely criticised for ignoring some case law and giving inaccurate results. Much of the controversy revolves around the mutuality of obligation, which the tool ignores as HMRC believes it exists in every contract. It might still be worth using it if you knew what it said, but we wouldn’t suggest that people unquestioningly accept the results.

So, what happens if you or your client make the wrong decision? An incorrect “inside” decision will leave you paying extra tax and NICs, which will often significantly impact the amount of money you take home. An incorrect “outside” decision will leave you paying less tax and NI than you should. HMRC can investigate years later and up to 100% of the debt can be added as a penalty charge. It’s very much in your interest to ensure your status is correct.

The one thing you shouldn’t do is ignore it; working outside IR35 when you should be inside is very risky indeed. Whether you should run your limited company depends on why you chose to go limited and whether you will be inside for all your contracts.

If you’re likely to be inside IR35 for every contract, and you’re only running your company to maximise your take-home pay, then you might be better off opting for umbrella employment. You’ll take home roughly the same amount of money and get full employment rights. If this applies to you, a specialist contractor accountant can advise on when and how best to close your company.

However, even if you’re working inside IR35, there could be many good reasons to keep your company open. For example, many contractors find that being a company director improves their standing with their clients and makes it easier to secure more work. You may have put a lot of time and effort into building up your brand and business and don’t want to risk losing it. You may expect your next contract to be outside IR35.

IR35 And The Private Sector

IR35 reform hit the Private Sector in April 2021. Whilst we are disappointed by these implemented changes, contractors are nothing if not pragmatic, so it is crucial to know how to get prepared within a shifting regulatory context.

Before deciding what action to take, you must understand your position. IR35 is complex legislation, so we’d advise any contractor who trades through a limited company to get an independent assessment from an IR35 specialist. Your assessment should be revisited for each new contract and each new client. This has always been sound advice, but it’s even more critical in the context of private-sector reform.

Your assessment should include the reasons for your IR35 status and advice on how your position could be strengthened, for example, with amendments to your contract or changing your working practices. Whether you’re assessed as inside or outside IR35, make sure you understand why and that you can evidence your position if necessary.

As part of finding a position, one method is using the HMRC’s online Check Employment Status for Tax (CEST) tool. CEST has been criticised since its launch in 2017, and you’re not required to use it or accept the answer it gives you. However, some end clients may rely on it, so finding out what it says is advisable. The earlier you take the test, the more time you have to seek advice and make changes if you don’t get the “right” answer. HMRC has promised to stand by the results of CEST, but only if they agree that the information entered is correct.

Once you’ve received specialist advice and you’re clear on your IR35 position, it’s essential that you listen to that advice. A clear “outside” assessment is your cue to gather as much evidence as possible to support your status. Refer to our Guide for details of what evidence will be helpful to you.
If your independent assessor believes you’re clearly inside IR35, we strongly advise that you act on their advice. Operating as if you’re outside IR35 when you’re inside could be very expensive in the long term. Additionally, if the expected reform goes ahead and a client assessment reveals your correct status, this could prompt HMRC to investigate, and your position would be precarious.

Recruitment agencies and end clients are concerned about IR35 reform as well. An incorrect “outside IR35” assessment will carry a risk for them, while “inside” decisions will create extra work and increase their costs. It’s very much in their interests to assess your status correctly.

Assuming you expect to work for the same agency and client in April 2021, speaking to them about how they intend to handle IR35 reform is a good idea. Speaking to them early will allow you to address any concerns and ensure they understand your position if and when they have to assess your IR35 status.

Confirmation of arrangements (COA) is a document confirming all parties in the supply chain agree about your IR35 status. Drawing one up with your client as part of your discussion will make it less likely that they will change your IR35 status when they become responsible for it.
If the client has a large contingent workforce, it makes sense to discuss the reform with your fellow contractors and collaborate with them in discussions with the client. You’ll have a more robust, louder voice that businesses are more likely to hear. 

This is the situation that most contractors are concerned about; if your client is made responsible for assessing your IR35 status, what if they get it wrong? As we’ve said, we believe a well-informed client will want to determine your status correctly, so your best defence is to collaborate with your client and ensure they’re well-informed. If they have concerns, your independent assessment and the evidence you’ve gathered could go a long way to resolving them.

Despite your efforts, your agency or client may insist that you work inside IR35 or use an umbrella company. Depending on your relationship, you can discuss it with them, and they might be prepared to reconsider. In case the client is not ready to change their assessment or has made a policy decision not to engage with PSCs, consider seeking an alternative contract. If you accept the client’s decision, you will see a reduction in your take-home pay, and you may need to negotiate an uplift to your rate to offset this.

Umbrella employment is often the better choice if you’re working inside IR35, while if you’re working outside IR35, your limited company is still the most tax-efficient way. Your decision on whether or not to close your company will depend on whether you expect future contracts to be outside IR35.

If you work for several clients, you might work inside and sometimes outside, so you may need an easy way to switch between trading through your company and being employed by an umbrella.

Suppose you’re lucky enough to be a client of Companion Accountancy. In that case, you can switch seamlessly between using your limited company and umbrella employment at no additional cost, which makes it much easier to manage a “mixed-status” situation.

IR35 And The Public Sector

If you’re working in the Public Sector, the end hirer is responsible for deciding if your contract falls inside or outside IR35. Unlike the Private Sector, where there is an exemption for small companies, all public-sector clients are included.

Where your end client is a public-sector body, they will have been responsible for determining the IR35 status of contractors since April 2017, which means you can expect them to have an established process for dealing with IR35. Even so, if you know you’re outside IR35, you’ll want to do everything you can to help them come to the correct conclusion and satisfy yourself that the process is suitable and that decisions are being taken fairly.

Assuming you are outside IR35, the best way to influence the decision is to provide as much accurate information as possible to your client during their assessment process. It will include evidence of your working practices and might go as far as obtaining a professional assessment.
The Government’s Check Employment Status for Tax (CEST) tool has faced much criticism, as mentioned previously, but Public Sector bodies are using it, which means you must deal with it at some point. The use of CEST should be combined with assessment by independent experts, and if this is not the case, you should feel free to voice your concerns to your client, particularly if the result doesn’t match other assessments of your status.

This tool asks a few more questions than HMRC and is based on previous case law history. The short questionnaire will produce a detailed report explaining where your case is strong or weak, unlike HMRC’s tool, which provides no insight into the result.

A strong inside or outside result using this tool may be enough to persuade your public-sector client or to help you decide whether to accept it. If you are not satisfied, there is more you can do.

A full contract and status review can be carried out by a specialist such as our partner, Bauer & Cottrell. A review will involve more than an online tool and allow an advisor to talk to you, your agency, and the end client about contract terms and working practices. The outcome of such a review, based on evidence pooled from many sources, can prove decisive.

Despite your best efforts to “persuade” your client that you have evidence of being “outside” IR35, the decision is for them to make, and they may not agree to a re-evaluation. At this stage, you and your agency have a choice.
You can choose not to accept the decision and leave your current contract. Many have done this and sought alternative work to safeguard their earnings.

You and your agency can disregard the assessment and continue to pay your Limited company without deducting PAYE and NIC from the payments. Ultimately, this is a risk for your agency as they are responsible in the legislation for ensuring the correct taxes are deducted based on the opinion of the end client. You may be able to use all the techniques described above to influence your agency, but they will ultimately decide based on their own robust system and attitude to risk.

You can accept the determination and consider how to operate “inside IR35”. At this stage, you will acknowledge that you will be taking home less money, either through your Limited company or by moving to an Umbrella model. If you decide to switch to an umbrella company employment, you might consider asking for a rate increase to protect your income.

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