Everything you always wanted to know about IR35 but were afraid to ask

  • What is IR35?

    The Intermediaries Legislation, or IR35 as it is more commonly known, is the single most important tax law affecting you as a freelance contractor.

    The aim of IR35 is to prevent an individual, who would ordinarily be viewed as an employee, from offering their services through a limited company in order to avoid paying Income Tax and National Insurance Contributions.

  • What does IR35 mean in simple terms?

    If you as an individual enter directly into a contract with an employer, you will receive a salary that would be subject to Income Tax of up to 45% and National Insurance Contributions of up to 12%.

    Where a limited company enters into the same contract then the tax rules are different. A limited company will not be viewed as receiving a salary. It will make a profit on which it will pay business tax of only 19% and most importantly it will not be subject to National Insurance Contributions at …

  • What are the conditions needed for IR35 to apply to my contract?

    1. An individual performs services for a client.

    2. These services are provided under a contract involving a limited company.

    3. If the services were provided under a contract directly between the individual and the client, the individual would be regarded as an employee of the client.

    Conditions 1 and 2 will apply to all contractors providing their services through a limited company. It is point 3 that creates the uncertainty in deciding whether or not to apply IR35.

    One exception to these conditions is in relation to being an ‘Office Holder.’ By simply …

  • Why is there uncertainty as to whether or not to apply IR35 to my contract?

    Whilst IR35 itself is a tax law, in order to determine whether or not to apply IR35 you need to understand employment law and establish if you would be regarded as an employee of the end client in the absence of your limited company (often referred to as ’disguised employment’).

    Unfortunately, to make matters worse, employment law does not provide a distinction between employment and self-employment, leaving you to rely upon past judgments in common law to reach your decision.

  • What are the criteria to indicate that I am an employee or in ‘disguised employment’?

    In determining the status of an individual as employed you would need to establish that all three prerequisites of employment status are present. These would be that:

    You are required to provide the service personally.
    You are subject to Supervision, Direction or Control over the manner in which the work is performed.
    There is a mutual obligation of both parties; your employer is obliged to provide work and you are obliged to make yourself available to do so.

  • So to be deemed as ‘outside IR35’ will I need to show I am in business on my own account (effectively self-employed)?

    For IR35 to apply you need to be regarded as an employee of the end client. So conversely to be outside of IR35 legislation, you need to show that you are not an employee of the end client.

    This is not the same as showing you are self-employed, although being able to demonstrate you are in business on your own account is always regarded as the best option.

  • How do I try to remain 'outside' IR35?

    Behave like a business – you need to differentiate yourself from the actual employees of your end client, beginning with the contract you sign and how you act on a day to day basis.
    Review your contracts – do not sign a contract until you have taken professional advice and are satisfied with the IR35 terms and conditions.
    Collect evidence – keep records of particular events which demonstrated how you acted differently from an end client employee e.g. during an IT failure you went home and received no pay, …