What is IR35?
IR35 is a tax legislation aimed at “disguised employees” who set up limited companies to work and get paid, but avoid income tax and national insurance contributions (PAYE). In the UK, if you are a contractor, you work in the public sector or engage with other businesses as a consultant, IR35 affects whether your contract and pay are “inside” or “outside” IR35. As of 2021, your clients (If not seen as a small company), not you, are responsible for determining your IR35 status and this is not something to be taken lightly.
What is Inside IR35?
If you are deemed to be inside IR35, it means your contract is taxed as if you are an employee. Your take-home pay will be reduced by between 20 and 30 per cent, because you will pay income tax and National Insurance on all of your earnings, as opposed to the more tax-efficient corporation tax and dividends route.
What is Outside IR35?
Outside IR35, you are treated as self-employed (same as in your own limited company) and pay corporation tax at 19-25%, and dividends tax at 8.75-39.35%.
For example, a contractor earning £500/day and working 48 weeks will have a net income of £70,000 inside IR35, but £90,000 outside IR35, after tax and national insurance.
How to remain outside IR35
To determine IR35 status, your contract and working practices are assessed against a number of criteria, 3 main ones being:
- Control. Do you control what you do, how, when, and where you do it? (e.g. set your own hours?)
- Substitution. Does your contract have a substitution clause (even if you never use it?)
- Mutuality of Obligation (MOO). After your contract ends, does the client have to offer you more work, or do you have to accept it?
Run your contract through these points to check that it is solid. It is wise to get it reviewed by an IR35 specialist such as Kingsbridge or Qdos.
Pitfalls to Avoid
Some clients will do “blanket” IR35 determinations, deciding that everyone who works through a limited company is automatically inside IR35, regardless of their actual working practices. This is not compliant with IR35, so show them evidence to the contrary. If a client refuses to agree to working outside IR35, ask for a higher hourly rate to offset your tax losses.
Why Does IR35 Matter?
Mismanaging IR35 could result in an unexpectedly large tax bill and potentially an HMRC enquiry. An accountant who specialises in contractors should review all your contracts, advise on best practice and support an appeal if your outside IR35 working status is unfairly judged as inside IR35. We use FreeAgent to keep track of your spending and prepare you for either scenario.
Tackle IR35 Head On
IR35 is complex, but you can take steps to ensure you are covered. Don’t wait until you’ve been told you’re inside IR35 – or worse, received a large bill from HMRC – to sort it out.
Book a free consultation with Bright Ideas Accountancy today to review your contracts and take-home pay.
