A Guide to IR35

Never heard of IR35? Don’t worry, that’s exactly what we’re here to clear up, with this article providing the lowdown on what IR35 is, why it could be a problem for your company, and how to get around it.

What is IR35?

IR35 refers to a piece of legislation which comes into play when a would-be employee works for an organisation but not as an employee, for example if a private contractor works as a limited company or sole trader. The IR35 allows the organisation to register this contractor, under their limited company name, as part of their organisation and so adds them to the HMRC list for the organisation.

It is widely referred to as “off-payroll working”, with the size of the contractor’s limited company a factor in determining whether or not the IR35 is applicable.

What does it mean for companies?

If you are the company who hires private contractors and they are asking you about IR35, you should have a full understanding of what the IR35 means for you. Before you get started, know that whether the contract with your contractor falls under the scope of IR35 is up to you – and the contractor cannot be added to an IR35 without your permission. This has become even more prominent with the arrival of new rules in April 2021 which state that both the private and public sector must abide by the same rules and give overall IR35 status responsibility to the end client / organisation receiving the services.

Why is this? Mostly because if a contractor falls under IR35 status, the payment of their taxes and National Insurance contributions falls under the responsibility of that end client / organisation, and so it is up to them to deduct those contributions from the final payment they make to the contract worker.

So, if you’re a company or contractor working with the end client, know that whether or not your contract falls under IR35 is now up to them – and that each individual project will need to be assessed separately. If they decide it doesn’t, then you are responsible for paying your own tax and National Insurance contributions – and this is where companies need to be even more vigilant than before to ensure they are always paying the right tax and are not hit with a hefty bill in the future. If they decide it does, then they will deduct what they need to from your gross payment and will pay the employer contributions themselves.

What are the risks associated with IR35?

One of the biggest risks comes in knowing who decides what, especially for those private sector companies where the rules have now changed.

Because the end client company is now responsible for assessing the employment status and determining whether or not IR35 is applicable, contract workers need to understand what is happening so that their tax remains consistently paid. These contract workers will also need to be aware that the end client can deduct their tax and National Insurance contributions from the final payment, meaning that many will lose out on a portion of their income unless they increase their prices before opening a new working contract.

The other biggest risk is that if you are found to be operating incorrectly under the new system, and you can and will be investigated – which can harm your income and employment status. Operating incorrectly could mean any of the following:

  • As a contractor, you become named as the sole provider of a service. If this is the case, you become an employee in the eyes of HMRC and your IR35 status is under threat.
  • You do anything that shows that you are under the control of your client – for example picking up work that you are not contracted to do.
  • Always have estimated weekly work hours in the contract – never work on a zero hours’ contract or IR35 is under threat.
  • You get paid time off.

The same is true of all the above situations on the side of the business or end client, because it shows you listing an individual under IR35 but then treating them like an employee – encouraging HMRC to come and check it out.

What is the solution?

As is always the case, our biggest recommendation is to get smart and familiarise yourself with the IR35 changes and what it means to you – whether you are reading this as a contract worker or the end client. The biggest shift is for private companies as they have now joined the same regulations as public companies – however there are (as always) exemptions, and so the more you know the easier the process will be.

Our aim is to make everything as straightforward for businesses as possible. That’s why if you have any questions about IR35, we’re always happy to talk.