Inside and Outside
IR35
An Introduction to IR35
IR35, officially known as the Intermediaries Legislation, is a UK tax law aimed at identifying individuals who are effectively working as employees while operating through an intermediary, such as a limited company, to reduce their tax liabilities.
Introduced in 2000, IR35 addresses “disguised employment,” where individuals avoid paying Income Tax and National Insurance Contributions (NICs) at employee rates by contracting through their own companies.
Key Points:
- Who it Affects: IR35 applies to contractors and freelancers working via limited companies or personal service companies.
- Inside vs. Outside IR35: If a contractor is "inside IR35," they are considered an employee for tax purposes, and taxes must be paid accordingly. If "outside IR35," they are deemed a genuine business and can pay themselves in a more tax-efficient manner.
- Determining IR35 Status: Status is evaluated based on factors such as control, substitution, and mutuality of obligation between the contractor and the client.
FAQ Section on IR35
How is IR35 status determined?
- Control: How much control the client has over the contractor’s work. If the client dictates where, when, and how the work is done, this suggests employment.
- Substitution: Can the contractor send a substitute to perform their work, or are they personally required to do the job? If substitution is not allowed, this indicates employment.
- Mutuality of Obligation (MOO): Does the client have a continuous obligation to offer work, and is the contractor obligated to accept it? If so, this might suggest employment.
Who determines IR35 status for my contract?
If you are working for a medium or large private sector company or in the public sector, the client is responsible for determining your IR35 status. If you work for a small private company, you (the contractor) are responsible.
What happens if I’m deemed inside IR35?
If you're deemed inside IR35, you'll need to pay income tax and NICs as though you were an employee. Your take-home pay will be reduced as a result, and you'll likely receive a PAYE tax deduction from your payment.
How can I tell if I’m inside or outside IR35?
You can use HMRC’s CEST (Check Employment Status for Tax) tool to get an idea of your IR35 status. However, the outcome of the CEST tool isn’t always legally binding. For more assurance, you might want to seek professional advice or have your contract reviewed by an IR35 expert.
Can I appeal an IR35 determination?
Yes, you can appeal the determination made by the client if you believe it's incorrect. You can request that the client reviews the decision, and they must respond within 45 days with an explanation or a new determination.
What are the penalties for getting IR35 wrong?
If you misclassify your IR35 status, HMRC can demand backdated tax payments, National Insurance Contributions, and penalties for non-compliance. Clients or agencies that fail to properly assess IR35 status may also face fines and additional charges.
