If you are just starting out as a contract worker for the first time, you will inevitably have a number of questions and concerns. How will you approach potential clients? Do you need to be more flexible to get all of your work completed? How will you manage your workload if you get ill? Can you take a stress-free holiday while keeping clients happy?
But perhaps one of the most common queries raised when starting out in self-employment is: what is IR35 and how will it impact my life?
Even the most experienced contractors have questions surrounding the topic of IR35, so if you’re unsure of what the legislation is, don’t feel alone.
Despite the complicated nature of IR35, with a little explanation and forward-thinking, you’ll be able to clarify how you are positioned in terms of IR35 to ensure you adhere to the correct tax requirements
Read on as we provide a simple guide to IR35 for dummies.
What is IR35?
IR35 is legislation designed to figure out whether a self-employed worker or business is being completely honest regarding an individual’s employment status. This essentially decides whether they are a full-time employee or a genuine contractor.
Before this legislation came into place, some individuals had tried to take advantage of a loophole in the system in which they fraudulently claimed to be working for a limited company structure. By doing this, contractors would be able to receive tax benefits. At the same time, an employer would be able to falsely claim that they do not need to pay National Insurance contributions or provide statutory employee benefits.
Since being introduced in 2000, this well talked about piece of tax legislation has become a hot topic, with the government referring to those who wrongly dodge correct employment definitions as ‘disguised employees’.
Since the organization is reaping the benefits of a full-time employee but without taking responsibilities besides paying the worker’s wage, they are effectively cheating both the worker and the system. Whereas the employee is getting several tax breaks that they otherwise would not have access to.
Who does IR35 apply to?
IR35 can impact all contractors, sole-traders, and freelancers. So, if you invoice clients, pay yourself and work on your own terms, this will apply to you. IR35 will also apply to those working as Limited Companies.
Why does IR35 compliance matter?
It’s important to understand why IR35 compliance matters so that you can ensure you stay on the right side of the law and don’t fall foul of a complicated investigation.
If HMRC finds that you have been working on a self-employed basis, described as ‘outside IR35’, when the service you provide your client reflects that of employment, you’ll be facing financial penalties.
Given HMRC can investigate as far back as six years, being found non-compliant can have substantial financial consequences if the investigation is successful.
If you are found to be inside IR35, you will have to pay all tax and National Insurance Contributions, just like you would have to if you were employed. This can have large financial repercussions, often reducing a contractor’s income by up to 25% while leading to costly penalties.
If you are found to be outside of IR35, you won’t have anything to worry about. This should be the case for genuine contractors and will mean that you can continue working as normal for the foreseeable future.
Who is responsible for deciding IR35 status?
Currently, in the private sector, it is down to the self-employed worker to determine whether or not they are IR35 compliant. However, this will soon not be the case because, as of April 2020, the responsibility will instead shift to the end-client to determine.
The onus will be on the business to dedicate time, resources and money towards ensuring contracted individuals are not directly ’employed’ by them and are still compliant.
Unfortunately, HMRC doesn’t make it simple to distinguish between contractors and employees. They have collated a range of questions for contractors to answer in order to gauge the correct status. This is known as CEST tool.
HMRC says that it will listen to the results of using CEST, however, in the past this hasn’t necessarily been clear, and they may still investigate.
Are there any ways around IR35?
The ideal way for a contractor to circumnavigate IR35 would be to partner with an umbrella company as this would allow for all of their income to be taxed as ’employment income’.
However, this isn’t their only perk. Umbrella companies are unique because they blend the benefits of both permanent work and contract work. As such, they provide the independence that comes with being a contractor, alongside the incentives and security associated with full-time employment. Ultimately, this means that an umbrella company can offer you the best of worlds.
If you do choose to go down the route of an umbrella company, it should go without saying that you must research the company’s history thoroughly. This is so that you can have a full understanding of what you are getting yourself in for. Be aware of their fee structure, payment frequency and any other possible benefits, such as insurance, that they may be able to offer you.
One thing you should not have to worry about when shopping for an umbrella company is IR35. Since you are being paid through the PAYE system and work under a contract of employment, there will be no cause for concern in terms of determining your status.
However, it will be good practice for those operating in the contractor market to request an IR35 review before signing a contract with any client or agency to ensure full safety against the legislation.
Finding your umbrella company
Are you looking to work with an umbrella company? Protect yourself from IR35 stress and experience the best of both worlds. Start your search today by using our umbrella company comparison tool. Quickly look through the different options and compare everything from fees to benefits.