IR35 has been the one thing on every independent worker’s mind in the UK for the last couple of years. But what is IR35? This legislation has left freelancers, contractors, and the organizations that employ them feeling confused and a little bit apprehensive. But IR35 is nothing to be afraid of, as long as you are clear in your working arrangements. In this article, we break down what IR35 is and how you can determine your own or an independent worker’s IR35 status to ensure you remain compliant.
What is IR35 legislation?
In a nutshell, IR35 is legislation that was brought in by the UK government to stop tax avoidance from “disguised employees”. A disguised employee is described as an independent worker such as a Limited Company Contractor, who is providing services to organizations in a manner that would ordinarily be deemed as an employee’s role. For example, coming to work in an office from 9-5, and also having access to company employee benefits.
IR35 is designed to ensure independent workers are assessed and contracted in the right way - and pay taxes accordingly.
What are the rules of IR35?
There are guidelines to determine whether you are ‘inside’ or ‘outside’ IR35. If you’re outside of IR35 this means you’re able to reap the tax benefits of paying yourself a salary and dividends, which means ultimately, you’ll pay less tax and earn more than a full-time employee would.
However, if you’re inside of IR35, and seen as a potential ‘disguised employee’, then you’re likely to owe more tax, meaning it may actually not be as beneficial for you to be an independent worker for that organization.
So how do you ensure you’re outside IR35? IR35 rules apply to all independent workers and the organizations that they work for, and HMRC has set out a number of guidelines to determine whether someone is ‘inside’ or ‘outside’ of IR35.
Below are some of the main determining factors when considering an independent worker’s IR35 status:
How services are provided and the level of control
The level of control an independent worker has over their work is a big determining factor for whether you’re found inside or outside of IR35. Contractors and freelancers should have autonomy over when and how they work in order to be deemed truly self-employed and thus outside of IR35.
Limited Companies (or PSCs - Personal Service Company as they are officially classified)who are able to get someone other than themselves to carry out the work for the end hirer are also much more likely to fall outside of IR35.
Obligation
Does the end hirer still pay the worker if they are sick or on holiday? If the answer is yes then this is a clear indicator that the worker is an employee and does not have independent status.
Does the worker decide when, where, and how they work? Then it is clear that the worker has independent status.
Whose responsibility is it to determine IR35 status?
It is the responsibility of the organization or end hirer to determine and declare an independent worker’s status as either inside or outside of IR35, so it is important to consider the factors above to make sure all workers are classified correctly. You can also read our article with our 5 tips for keeping your project compliant.
IR35 investigations can be stressful and an inconvenience, so getting clear on a contract before starting a job is important purely to save you the hassle of an investigation into the organization, and the possibility of a hefty unwanted tax bill.
But this legislation really isn’t the end of the world and it’s not a reason to shy away from independent working or hiring contractors.
If we look at the benefits of this legislation, it encourages organizations and independent workers to get really clear on their projects and behave in a clearer, more defined way which is no bad thing for anyone.
Creating a clear contract and communicating upfront about how the project will be undertaken will not only keep both the organization and the independent worker compliant, but it will streamline processes greatly, making the work that’s being done much more efficient.
So, see IR35 as an opportunity to gain more clarity around the way you work, and as long as you can clearly evidence compliance with the HMRC guidelines, then there’s nothing to worry about.
What if I am found inside IR35?
If you’re an independent worker then it is your decision to decide whether you wish to accept contracts that fall within IR35. Make sure you review any contracts, proposals, or SOWs before accepting the job and you may even wish to negotiate the terms in order to ensure it is still a fruitful project for you.
It’s important to note that IR35 status is determined per contract, so you can have some that fall inside and some that fall outside, you will not be penalized with a blanket decision should one contract fall inside IR35.
To find out more about how organizations can streamline their projects and remain compliant, check out our article Can a Statement of Work Solve IR35 Challenges.