What is IR35?
Do you know your IR35 status? It is one of the biggest obstacles a contractor has to face before they start working, so it is crucial to know what it is and what effect it may have.
IR35 is a piece of tax avoidance legislation introduced in April 2000 that affects all contractors who work through a limited company or partnership. Sometimes, HMRC refer to such a company as a “Personal Service Company” since the contractor is the owner and director of their own company and they alone provide their company’s service.
The aim of this legislation was to crack down on disguised employees – workers who benefited from tax advantages associated with owning a limited company, but were otherwise full-time employees for their client.
Inside and outside IR35
HMRC have created tests that they use to determine if a contractor falls inside or outside IR35. If a contractor was to be considered “inside IR35”, it means that they aren’t seen as self-employed by HMRC and will get taxed like an employee as a result. On the other hand, “outside IR35” means that a contractor is self employed and works through their own company so they are exempt from national insurance deductions.
The tests that HMRC use to determine your IR35 status are used to judge how much risk and responsibility is involved in a contractor running their company.
Some of the responsibilities of a company director that are examined include:
Financial risk
How often does your client pay for your services and do you go for long periods of time without being paid?
Provision of work equipment
Do you pay for and use your own work equipment?
Employee benefits
Do you have statutory rights (holiday pay, sick pay, maternity pay and leave, etc.)?
Control
Do you have full control over your own work schedule or are you managed by your client?
… and more.
