What is IR35? An overview

 IR35 – What is it?

What is IR35?

IR35 is a law which impacts contractors and their hiring organisations (‘clients’) and first came into force in April 2000​. The“IR” stands for “Inland Revenue”, which is the old name for HMRC.

Effectively states that contractors who have similar conditions and obligations to employees should be classed as such rather than self-employed.

Who determines my IR35 status?

In the public sector, responsibility for determining your IR35 status lies within the end client (or agency) who pays your limited company.

In the private sector, currently you are responsible for determining your IR35 status however this is due to change from April 2021. From April 2021, the end client will determine your employment status.

Companies can try to assess for IR35 but, in practice, oftentimes, there won’t even be an assessment and contractors will be deemed to be inside IR35​

Small companies are exempt from IR35 determination​

To be defined as a “Small Company”the company must have:

• Maximum 50 employees 
• Maximum £10.2m turnover 
• Maximum £5.1m on balance sheet 

Inside IR35

If HMRC deems you to fall “inside” IR35, this means you’ll be considered an employee of your client (the firm paying your bills) and therefore will need to pay taxes as though you were an employee.

Unfortunately, you do not get enrolled directly into various employee benefits programmes such as health benefits, automatic enrolment etc.

It is important for you to make sure that you are 100% clear about the implications on your personal and business finances and also your relationship with your client. It is important to discuss these topics with your accountant.

Outside IR35

If you fall outside IR35, this is positive news for you. It means that HMRC is happy for you continue operating as a self-employed person and earning income the way you are. You will not be deemed to be “employed” for tax purposes.

While this also means that you will continue to be responsible to pay all your taxes, you will be able to decide what salary you draw and what income you draw as dividends.

Status?​

Underlying rules not changing but who is responsible for assessing IR35 (i.e. whether one should be classed as an employee or not) was initially meant to change on 06 April 2020 but has been delayed to 06 April 2021 in the wake of the Coronavirus crisis​

Useful resources 

Check out the Government’s CEST tool which is a helpful resource to check how you may be classed for tax purposes(employed or self-employed)

https://www.gov.uk/guidance/check-employment-status-for-tax

Worried that you might be under the wrong IR35 determination? We recommend you speak with an accountant to ensure you get the best advice.

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