What is IR35 and does it apply to you?

You’ve landed in the right place if you want IR35 explained simply without the waffle and tax jargon.

To help, we’ve put together a no-nonsense guide that explains:

• What IR35 is
• The difference between inside IR35 and outside IR35
• How to easily check your IR35 status

What is IR35?

IR35 explained in its simplest terms is:

• A piece of tax legislation, introduced in April 2000.
• The government identified a loophole where contractors worked for companies as contractors, but actually, they were employees in every sense but in name. That is, they were receiving all the benefits of being an ’employee’ (sick pay, holiday pay etc.), but they weren’t being taxed as an employee.
• IR35 is designed to stop contractors from avoiding tax in this way.

This legislation was updated in April 2021 to make medium and large-sized private-sector employers responsible for determining the IR35 status of any contractor they hire. This was already the case with public-sector employers. This amendment is known as IR35 reform or ‘off-payroll working rules’.

It remains the contractor’s responsibility to determine their IR35 status and pay the appropriate taxes if working with a small private-sector company.

What does ‘inside IR35’ mean?

You may have heard the terms ‘inside IR35‘ and ‘outside IR35‘, but what does ‘inside IR35’ mean?

If you work as a contractor or if you hire contractors, it’s important to understand the difference.

HMRC could catch up with you for unpaid taxes, interest and impose financial penalties upon your business if you slip up here.

Inside IR35

If your contract is ‘inside IR35’, you are considered to be an employee, as far as HMRC is concerned. This means you will need to pay the correct employment taxes and National Insurance Contributions (NIC) as if you were employed directly.

Tax and employment legislation are two separate things. Therefore, even though you are classed as an employee for tax, it doesn’t necessarily mean you’re entitled to employment rights.

Outside IR35

Conversely, if your contract is ‘outside IR35’, you are considered self-employed, for tax purposes. This means you will need to pay the correct tax and National Insurance Contributions yourself, through Self-Assessment.

A contract that is ‘outside IR35’ is one business providing a service to another business, as opposed to an employee being employed by an employer.

How do you determine your IR35 status?

If you are providing your services through a limited company, HMRC needs to be fully aware of the relationship through which you are carrying out the work. This is to make sure you’re not using the limited company to disguise the relationship between an employer and employee.

• It’s important to note that IR35 criteria are measured against the role, not the individual. Therefore your IR35 status (whether you’re inside or outside IR35), can change from contract to contract.

IR35 status can be checked using this IR35 calculator. This will come in handy to check the IR35 status of a contract assignment, whether you’re a contractor, an employer, or a recruitment agency.

As a business hiring contractors, it is your responsibility to determine the IR35 status of the contractors you hire.

You will need to issue your contractors with a Status Determination Statement that clarifies their IR35 status (inside or outside IR35) and an explanation of why.

Why is it important to know your IR35 status?

HMRC can investigate your business at any time and can go back as far as six years looking for non-compliance.

• The financial impact of IR35 can mean you have to pay Income Tax and National Insurance Contributions (NIC) from past jobs, plus interest.
• If you’ve been disguising work to be ‘outside IR35’ rules, or even unaware you were going against the rules, HMRC can also apply financial penalties, which can have dire financial consequences for your business.

For more information, check out Crunch’s IR35 hub, which provides a range of useful content including guides, videos, and a free online assessment on the subject.