If you are a self-employed contractor or work through a limited company, you have likely heard of IR35. It has been a hot topic for several years and still affects thousands of contractors and the businesses that hire them. 

This guide will explain what IR35 is, why it was introduced, how it affects you and what to do if you are unsure of your status. 

What is IR35? 

IR35 is a set of tax rules that apply to contractors who provide services through an intermediary (usually a limited company). The rules aim to work out whether you are genuinely self-employed or actually working like an employee. 

If HMRC believes you are working as an employee but using a limited company to pay less tax, you may fall inside IR35. This means you need to pay tax and National Insurance as if you were employed. 

If you are outside IR35, you are treated as self-employed and can pay yourself in a more tax-efficient way. 

Why was it introduced? 

IR35 was brought in to stop what HMRC calls “disguised employment”. Some people were working full-time for a business, just like a regular employee, but using a limited company to pay lower tax. 

HMRC introduced IR35 to make sure people working in the same way as employees pay a similar amount of tax. 

How IR35 might affect you - Individual

If you are inside IR35: 

• You pay income tax and National Insurance similar to an employee. 
• You cannot claim the same expenses that a self-employed person can. 
• Your take-home pay may be reduced.

If you are outside IR35: 

• You can split your income between salary and dividends. 
• You may have more freedom with expenses. 
• You usually have more control over how and when you work.

How IR35 might affect you - Contractor

If you hire contractors, you may now be responsible for checking their IR35 status. This can add admin and cost, especially if you get it wrong. 

Since 2021, medium and large private sector companies are responsible for deciding if a contractor falls inside or outside IR35. In the public sector, this has been the case since 2017. Small companies are still exempt from this and the contractor remains responsible. 

What are the consequences of getting it wrong? 

If you are wrongly working outside IR35, HMRC can demand backdated tax, interest and penalties, which can amount to thousands of pounds. 

If a business wrongly classifies a contractor, they could face the same financial penalties, which can also damage their reputation and contractor relationships. 

How to tell if you are inside or outside of IR35 

There is no single test, but HMRC looks at several factors: 

• Control – Does the business decide how, when and where you work? 
• Substitution – Can you send someone else to do the work? 
• Mutual Obligation – Is the business obliged to give you work and are you obliged to accept it?

If the answers suggest you are working like an employee, you are likely inside IR35. 

Still unsure? Here’s what to do:

• Use the CEST Tool - HMRC offers a tool called Check Employment Status for Tax (CEST). It gives an idea of your IR35 status based on how you work. 
• Get a contract review - A professional can review your contract and working practices to give you a clear opinion. 
• Speak to an Accountant or Advisor - They can help you understand the risks and make sure you are complying with the rules.

Final thoughts 

IR35 can seem confusing, but understanding your status is important. If you are unsure, don’t guess or presume you or your contractors are outside. Get advice before HMRC comes asking questions.  A small amount of time now can save a lot of stress and cost later. 

If you need help figuring out where you stand, we’re here to help.