Everything you need to know about IR35
Introduced by HMRC in April 2000, IR35 is a piece of legislation designed to tackle tax avoidance by contactors. It aims to do so by assessing whether an individual is a genuine contractor used by an organisation or is instead what is known as a ‘disguised employee’ for tax purposes.
The reason for the introduction of IR35 is that contractors often try and take advantage of the tax benefits offered. To do so, they work through a limited company when, in reality, they would be a regular employee of the company with the same benefits and responsibilities as other members of staff. Under the legislation, contractors fall either ‘inside IR35’ or ‘outside IR35’ depending on how HMRC assesses their employment status. This can often be confusing, so read our guide to IR35 to find out everything you need to know about this regulation as a contractor.
IR35 and Working as a Limited Company
If you are a contractor working as a limited company then it is crucial that you know how IR35 rules apply to you. The most important thing that any freelance contractor must be aware of is their IR35 status, and whether they fall inside or outside the regulation on any given contract.
In order to determine your IR35 status as a contractor working through a limited company, there are certain aspects of a contract that you can almost use as a checklist to figure out whether you fall inside or outside of IR35.
The most important part of any contract, when determining your IR35 status, is how much freedom you have over how you complete the assigned work. Should you be required to start and finish at a certain time, or carry out the work on specific days, in the eyes of the law your role would likely be seen as that of an employee rather than a contractor.
As a freelancer operating through a limited company, you should also look for a mutuality of obligation clause in any contract you decide to undertake; this is also a key part of determining your IR35 status. Usually, contractors are free to choose work, but if a certain client must offer you work and you are obliged to take that work, it signals a contract of employment rather than a client and contractor arrangement. If you cannot work on a project-by-project basis, or a certain contract prohibits you from working for more than one client at any one time, you are seen to be fulfilling the role of an employee rather than that of a self-employed contractor.
IR35: Public Sector and Private Sector
How you are affected by IR35 will also depend on whether you work in the public or private sector. In 2017, reforms to the legislation were introduced, affecting contractors working in the public sector. Since then, the onus is on public sector authorities rather than contractors to decide if they fall inside IR35 or not.
While those working in the private sector are still responsible for determining their own IR35 status, this is set to change soon. The Government has implemented change to the legislation, mirror those affecting contractors working in the public sector, which will come into effect on April 2020. From the beginning of the 2020 tax year, whether you are working in the public or private sector as a freelance contractor, it will be the responsibility of your clients to determine whether or not you are affected by IR35.
This means that from April 2020, your clients will be liable for: working how much you are paid, reporting this payment to HMRC, deciding if you need your own ID if you fall inside IR35, and informing HMRC of your end date once your contract has come to an end.