With a complex set of rules to navigate and the threat of high tax costs, IR35 is an anxiety-inducing subject for many contractors.
But after changing the way the legislation works for public sector contracts last year, the government is now planning to roll out similar reforms to IR35 in the private sector.
This makes it all the more important that you know where you stand when it comes to your employment status, and to prepare to justify your position.
What is IR35?
IR35 is legislation designed to stop tax avoidance through “disguised employment”.
This is where a worker provides services through an intermediary, such as their own limited company, but would otherwise be classed as an employee of their client.
The rules assess whether the relationship looks more like an employed than self-employed one – for example, if the individual has the same obligations, benefits and responsibilities as that of an employee.
Those who are seen as employees, according to IR35, will have to pay income tax and national insurance as if they were employed.
As a contractor, you’ll need to make sure you meet HMRC’s definition of self-employed to avoid high tax charges.
The story so far
The original IR35 legislation came into effect in 2000, before being reformed for the public sector in April 2017.
The government then announced its plans to reform the rules for the private sector, to bring them in line with those for the public sector.
Will IR35 affect you?
There’s no simple way to know if you’re within IR35, but there are certain questions you could consider when looking over your existing contract:
- what are the obligations between you and your customer?
- do you have benefits and responsibilities like that of an employee?
- do you have the right to send a substitute?
- can you hire others to help you?
- do you take on financial risk?
- do you provide significant tools or equipment?
- who controls when or how you achieve the task?
You can also assess your IR35 status by using HMRC’s check employment status for tax test.
This can be used by workers, clients or agencies to determine whether an individual is self-employed for tax purposes.
The highly technical detail of IR35 legislation can make it a difficult topic to make sense of, but we’re happy to help.
Our team of tax experts can talk you through how it might affect you and help you to prepare for the upcoming changes.
Get in touch with firstname.lastname@example.org for advice on IR35, or call us on 01628 631 056.