What is IR35? A Guide to IR35

This allowed these workers to gain the tax advantages of operating through a Limited company, particularly relating to National Insurance and VAT, without actually changing their relationship with the client. Since the introduction of IR35, HMRC’s position has been that ‘if it looks like an employee, acts like an employee and works like an employee – it’s probably an employee.

If you’re contracting, you’ve probably heard a lot about IR35. You may have taken contracts deemed inside or outside IR35, and seen your allowable expenses and income fluctuate as a result. It’s also possible you’ve heard stories of contractors who have fallen foul of HMRC, and had their IR35 status retrospectively investigated by the tax office. But do you fully understand it?

Now I know what is IR35? How do I know if I’m inside or outside IR35?

IR35 status is a complex issue, and anybody subject to an IR35 investigation by HMRC will find their business practices scrutinised in detail. The first place HMRC will look is at the contract, but the investigation can extend beyond this. In practice, there are a few key criteria that will let you know if you’re operating inside or outside IR35:

Control. If the client has control over the worker, they’re likely to be deemed inside IR35. For example, if you have to complete your work in a specific fashion or following company procedures, you’re inside IR35. If you have freedom to complete work as you see fit, you’re more likely to remain outside.

Substitution. Can you send somebody else to do the job for you? If the requirement is that you complete the work, rather than that the work be completed, you’re inside IR35.

Mutuality of Obligation. Is the client required to give you work, and are you required to accept the work? If so, you’re acting as an employee and will again find yourself inside IR35.

Passing these three criteria doesn’t mean you’re definitely outside IR35, although it’s a good benchmark. A good contractor accountant will review every contract before you accept it, and advise on your IR35 status. Complex or ‘borderline’ contracts may require specialist legal advice – however, this is rarely likely to be necessary.

What happens if my contract is inside IR35?

IR35 is designed to prevent ‘disguised employees’ gaining a tax advantage over regular employees. As such, it probably won’t be a surprise to hear that tax liability will increase and tax advantages will be stripped away when a contract is caught by IR35.

If you’ve been working inside IR35, you make a ‘deemed salary’ payment to HMRC at the end of the tax year. 95% of your company’s turnover, minus some allowable expenses, will be treated as your deemed salary. Income tax (PAYE) and National Insurance contributions are calculated on this amount – if you’ve paid a lower amount in tax/NI over the year, you’ll need to make up the difference. Your accountant will be able to provide further advice on this, and make the ‘deemed salary’ calculations for you.

If you have any questions about your own IR35 status, or for advice on whether a contract may fall inside or outside IR35, please call us on 01442 795 100 or drop us a line at sophie.lewis@dolanaccountancy.com.