If you’re a contractor or freelancer, you’ve probably heard of IR35. But what exactly is it, and how does it affect you? IR35 is a tax legislation designed to prevent tax avoidance by workers—sometimes called “disguised employees”, who provide services through an intermediary, such as a personal service company (PSC), but who would be classed as an employee if that intermediary didn’t exist.
The goal of IR35 is to ensure that these workers pay the same Income Tax and National Insurance contributions as an equivalent employee. But determining whether you fall inside or outside IR35 can be complex and getting it wrong could have significant financial implications.
A Brief History of IR35
IR35 was introduced in the UK in April 2000, and it hasn’t been without controversy. Many contractors and businesses have raised concerns over the additional administrative burden and potential financial impact. Over the years, the legislation has been refined and updated, but it remains a tricky area for freelancers, businesses, and even accountants to navigate.
Inside vs Outside IR35: What’s the Difference?
• Inside IR35 – If your contract falls within IR35, HMRC considers you an employee for tax purposes. This means you’ll need to pay Income Tax and National Insurance through PAYE, just like a regular employee.
• Outside IR35 – If your contract is outside IR35, you can continue operating as a self-employed person, paying tax and claiming expenses as usual. If you run a limited company, you’ll be responsible for filing company accounts and paying tax via Self-Assessment.
How to Determine If You Are Inside or Outside IR35
Figuring out your IR35 status isn’t always straightforward. Seeking advice from an accountant can help you ensure compliance and avoid unexpected tax bills. HMRC assesses contracts using several key criteria:
• Right of Substitution – Can you send someone else to do the work on your behalf? If the work must be completed personally, you’re more likely to be classed as an employee and fall inside IR35.
• Right of Control – Do you have control over how, when, and where you work? If the client dictates your working hours or location, you may be considered inside IR35. A genuinely self-employed person typically has more flexibility.
• Mutuality of Obligation – Is the client required to offer you work, and are you required to accept it? Employees usually have a continuous stream of work, whereas self-employed individuals can pick and choose their contracts.
Tips for Managing IR35 Compliance
• Review each contract carefully – Don’t assume all your contracts fall into the same category. Assess them individually to understand your IR35 position with each client.
• Keep detailed records – If HMRC investigates, you’ll need evidence to support your IR35 status. Maintain records of working agreements, correspondence, and proof of how you operate.
IR35 can be complicated, but understanding where you stand is crucial for managing your tax obligations and avoiding penalties. If you’re unsure about your status, getting expert advice from an accountant can help you stay compliant and financially secure. Got questions about IR35? Let’s have a chat, I’d be happy to help you navigate the rules and find the best approach for your business.
