What is IR35?
Introduced in 2000 to put an end to ‘disguised employment’, IR35 is based on the level of risk, liability and responsibility of a contractor.
If a contract shows that a worker has the same level of risk, liability and responsibility as other contractors, they will be seen as falling ‘outside’ of the legislation.
However, if, a contract is seen as being similar to that of a permanent employee, then the worker will fall ‘inside’.
Each contract is treated separately, which means that an IR35 status can change with each client.
Who decides whether a contractor falls inside or outside IR35?
Previously, it was up to the contractor to make an informed and honest decision about their IR35 status.
However, this all changed in 2021 and it is now the client who decides whether a contractor falls inside or outside IR35.
This decision was met with some concerns from the sector; even in the lead-up to the change, many businesses were starting to put all of their contractors under the same category of being inside IR35.
This was (and still is) likely due to many believing it’s the ‘safer’ option to avoid getting it wrong and facing questions from HMRC.
Businesses have the government Check Employment Status for Tax (CEST) tool to help determine a worker’s employment status, however, this is often criticised due to it not always giving an accurate answer.
Read our IR35 Rules page for more guidance on what HMRC considers when looking at a contract.
How does IR35 affect take home pay?
As you can imagine, IR35 has been met with heavy criticism over the years due to many contractors finding themselves being given an incorrect IR35 status.
And the reason why it’s faced such a backlash is because of how a wrong status can affect a contractor’s take home pay.
If a contractor is seen as having the same risk, liability and responsibility as an employed person then they will fall ‘inside’ IR35, meaning they will be subject to the same tax and National Insurance as an employee – this will result in them having to pay more than if they were to fall ‘outside’.
If they are seen as being part of an employed setup then this also limits self-employed expenses – one of the main benefits of contracting is being able to claim back on expenses made for business purposes, which can then help to reduce the amount of tax owed at the end of each year.
As you can imagine, it’s extremely problematic for self-employed professionals should they be given an incorrect IR35 status.
And, it is completely within a contractor’s rights to disagree with an employment status given to them by their client.
If you know that a contract falls outside IR35, then you can take a look at our Contractor take home pay calculator to get an idea of how much you could be earning.
We hope you found this page helpful. Our team of experts are available to answer any questions you may have, so either contact us via online chat, call us on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.
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