Need advice on IR35?
Even the most seasoned freelancer has at one point been totally confused by IR35, but it’s OK, we’re here to ease your woe and offer up advice. Ask us your IR35 related questions that you have been afraid to ask anyone else for fear of ridicule.
It can be a blur when first starting out and if you’re stepping out of permanent employment (be sure to check out our Essential Freelancer Accountant Checklist) to become a full time freelancer; you need to get things correct from the start.
You may find your answer in the IR35 information below (also check out the IR35 video), if not, send us a question. Or if you have a more general question around IR35, send that over.
There are many benefits of providing services to a third party through a limited company. The PAYE liability is reduced substantially, meaning a lower tax bill. However, some workers began providing services through an intermediary to reduce tax owed while otherwise being classed as an employee. IR35 legislation was introduced to prevent this misuse.
In 2007, further rules were introduced called the Managed Service Company legislation. As a result, anyone providing their services through a Managed Service Company will be liable to pay income tax and national insurance through PAYE.
When does IR35 apply?
If you are providing a service for a client and you are working through an intermediary, which will typically be a limited company or partnership, the rules of IR35 may apply. However, if you are working through a Managed Service Company, it will not. The crucial test of whether IR35 legislation applies is whether you would have been classed as employed if you had provided the service directly to the client.
- Hypothetical contract: A hypothetical contract has to be drawn between the worker and client, which includes its conditions and terms. If these prove that the contract falls within employment, then IR35 will apply. To decide whether the contract is one of employment, criteria provided by HM Revenue and Customs (HMRC) is used.
- Employment status: A worker’s employment status will dictate how tax is charged on income, as well as the amount. National Insurance contributions (NICs) will also be affected, as self-employed and employed individuals pay different classes of NICs.
- Criteria for employee: If you are told what to do and when, you are probably employed by the end client, especially if you can’t delegate to another party. An employed person is told to work a set number of hours, and when to start and finish their day. How someone is paid is also an indication of working status, as an employee will be paid an hourly rate on a weekly or monthly basis. Being paid overtime or a bonus is also an indication.
- Criteria for self-employed: If you are free to hire someone else to do the work on your behalf, you are self-employed. Provision of your own tools and equipment, other than the smaller tools that many employees have, occurs when self-employed. If you are paid a fixed fee, no matter how long the job takes, it is also likely that you are self-employed.
There are many other aspects of the employment status test that will help to indicate whether you fall within the rules of IR35, so it is best to seek advice if not sure.