IR35 and Sole Traders

What is IR35?

IR35 is a legislation aimed at putting a stop to ‘disguised employees’ – preventing workers from benefitting from the perks of self-employment when they are in fact employed.

You will be either ‘inside’ or ‘outside’ of IR35, with the outcome based on your level of risk, liability and responsibility as a worker.

If your contract shows similar working practises to other contractors than you will be deemed as being ‘outside’. If not, your contract will be ‘inside’ and treated similar to that of a permanent worker.

An IR35 status can change with each contract, so it is possible to fall into both categories during the course of a year.

What is a CEST tool?

A Check Employment Status for Tax, or CEST, is a government tool that is used to work out a worker’s employment status.

It uses information based on the following:

• Details of the contract
• The worker’s responsibilities
• Who decides what work needs to be done
• Who decides when, where and how the work is done

However, the CEST tool has long been criticised for being unreliable, with reports showing that it does not always give accurate results.

For example, the tool doesn’t correctly recognise mutuality of obligations between the contractor and hirer – an area that has in fact caused HMRC to lose some important IR35 cases over the years.

For more details on what factors are considered when looking at a contract, read our IR35 Rules page.

What are the latest changes to IR35?

Before April 6th 2021, a contractor’s IR35 status was decided by the contractor.

Now, the responsibility to place a contractor ‘in’ or ‘out’ of IR35 is up to the client to decide.

This has proved problematic for many contractors with some clients choosing to push all of their flexible workers inside the legislation in fear of getting it wrong and facing questions from HMRC.

There’s also the added concern for clients taking on a contractor deemed as ‘inside’ due to the fact that it now becomes the company’s responsibility to deduct the income tax and NICs as if they were their employer.

For more in-depth information about the new rules, read our updated IR35 2020 Changes page.

How does this affect sole traders?

Unfortunately, due to the recent changes, many businesses have decided to go for a ‘blanket assessment’ approach, meaning that some contractors are being (unfairly) put in the ‘inside’ IR35 category and therefore treated as if they are permanent employees.

This means that they are having to pay more tax and NICs and losing out on benefits they should be entitled to.

It’s important to be aware that you are completely within your rights to make an appeal to your client about a decision that you don’t agree with.

At Dolan, we would recommend that all contractors have an independent expert examine their contracts and working practices.

Hopefully this page has answered some of your questions regarding IR35 – if you have any more queries contact our team of experts on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.