As a contractor or freelancer in the UK, navigating the complexities of tax legislation is crucial to ensuring financial compliance. One such legislation that significantly impacts the self-employed workforce is IR35. In this guide, we’ll break down the essentials of IR35, helping you understand its implications and navigate this intricate landscape.
What is IR35?
IR35, also known as the “off-payroll working rules,” is tax legislation designed to identify and tax individuals who are deemed to be ‘disguised employees.’ These are contractors or freelancers working in a manner that, if not for the intermediary (usually a personal service company), would be considered an employer-employee relationship.
In essence, the impact of IR35 is felt by contractors or freelancers only if the nature of their work would classify them as employees under the businesses they serve. HMRC terms these individuals “Disguised Employees,” as they predominantly utilise the limited company they own as a strategy to mitigate higher tax payments.
You can find your if you are affected by IR35 by this IR35 calculator.
IR35 has does this affect me?
New rules for IR35 was introduced to stop the government from missing out on so much potential tax and national insurance money.
On September 23, 2022, Chancellor Kwarsi Kwarteng announced the repeal of the new rules, scheduled for April 2023. However, this decision was short-lived, lasting only three weeks.
The subsequent chancellor, Jeremy Hunt, reversed most of the tax changes outlined in the mini-Budget, including those related to IR35. As a result, the regulations in place before September 23, 2022, persist. Prior to April 6, 2021, contractors in the private sector had the autonomy to determine their employment status—whether they were “in” or “out” of IR35. Post-April 6, 2021, the responsibility shifted to the employer or client, who must assess a worker’s standing by completing a “status determination statement,” detailing the reasons for their conclusion.
Companies could get a fine if they get this wrong.
The new regulations are applicable if you answer affirmatively to both of the following criteria:
- Your services are delivered through an intermediary, such as a personal service company (e.g., a limited company), a recruitment agency, or a partnership.
- You provide services to medium or large-sized private sector businesses. In cases involving a contractor’s association with a small business, the contractor retains the authority to determine their own IR35 status.
Understanding whether you fall “inside” or “outside” IR35 carries significance for contractors in terms of tax implications:
- In the “Inside IR35” scenario, the employer deducts tax directly from your pay, similar to an employee. This applies when your role closely resembles that of an employee, such as office-based work.
- Conversely, if you are “Outside IR35,” you bear the responsibility for managing your own taxes. This is common for contractors operating through a limited company, engaged in diverse projects and often working from home.
Is IR35 relevant for sole traders?
For sole traders, the distinction between personal and business entities is not legally separate, in contrast to a company director utilizing a limited company structure. Sole traders personally own and manage their businesses, assuming full responsibility for any associated debts. Notably, IR35 legislation exclusively pertains to incorporated companies, meaning sole traders remain unaffected by these regulations.
Nevertheless, all companies, including those employing sole traders, are obligated to adhere to rules determining the employment status within or outside IR35.
Determining Employment Status: The Key Factor
The cornerstone of IR35 is the determination of employment status. HMRC assesses whether, in the absence of the intermediary (usually a limited company), the relationship between the contractor/freelancer and the client would be one of employment. Factors considered include control, substitution, and mutuality of obligation.
Implications of IR35 for Contractors and Freelancers:
- Tax Liabilities: If deemed inside IR35, the contractor is treated as an employee for tax purposes, resulting in additional National Insurance contributions and potentially higher income tax.
- Loss of Tax Efficiency: Contractors operating inside IR35 lose some of the tax advantages associated with self-employment, such as claiming certain expenses.
- Employment Rights: Contractors outside IR35 enjoy the benefits of self-employment, such as flexibility and independence. Those inside IR35 may have fewer employment rights.
Navigating IR35: Practical Tips for Contractors and Freelancers:
- Review Contracts: Regularly review contracts to ensure they accurately reflect your working relationship and minimize the risk of being deemed inside IR35.
- Demonstrate Independence: Actively demonstrate that you are in business on your account. Maintain control over how, when, and where you work.
- Use a Contract Review Service: Consider using professional contract review services to assess your contracts and working practices for IR35 compliance.
- Seek Professional Advice: Given the complexity of IR35, seeking professional advice from accountants or tax specialists is invaluable for contractors and freelancers.
In conclusion, staying abreast of IR35 regulations is essential for contractors and freelancers operating in the UK. Understanding your IR35 status, taking proactive measures to comply, and seeking professional advice can help you navigate this tax landscape with confidence and ensure the continued success of your contracting or freelancing business.