IR35: Everything you need to know

Are you struggling to fully understand IR35? You’re not alone. However, it’s important to understand the basics of IR35 as the rules can seriously impact your income if you get caught in it. Reach out to Aston Black for any advice regarding IR35 and its ramifications to ensure that you can be aware of everything you need to know.

What is IR35?

As a contractor, you are able to provide services to clients as a limited company, receiving a large part of earnings and dividends but saving on National Insurance and tax deductions as an incentive, because you do not receive full-time employee benefits.

IR35 is a tax legislation that was implemented to fight tax avoidance by workers who supply services via an intermediary, such as a limited company, but who would otherwise be considered an employee without it. These people receive tax breaks in addition to employee benefits, which is the core idea behind the term ‘disguised employee’.

The financial impact of IR35 is significant. It can reduce a worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and NICs. IR35 can look at the last six years and analyse your past contracts as well; if the legislation applies, then you will also incur penalties and interest.

How does IR35 work?

IR35 applies tests of employment that have evolved over decades by the UK legal system. IR35 involves applying three main principles from historical case law for their ‘tests of employment’:

  • Control: How in control is the client of how the worker completes the work?
  • Substitution: Is personal service by the worker required or could the worker send a substitute in their place?
  • Mutuality of obligation: This is a concept where the employer is obliged to offer work, and the worker is obligated to accept it.

Other factors are taken into consideration include the contract type, whether you are taking a financial risk, if you are an integral part of the client’s organisation, and if you are in business on your own account. When taking this evidence into account, if the balance of probabilities is that the worker is an employee then IR35 applies. For example, if a worker has the ability to send someone in their place to do the work, then personal service is not required so IR35 does not apply.

Who is affected by IR35?

Until 2017, contractors were responsible for establishing their IR35 status. After this date, reforms in the public sector meant that hirers can determine the IR35 status of contractors and that agencies are responsible for deducting tax from their contractors’ pay, and therefore risk being liable for unpaid tax and penalties if the worker is inside IR35.

The HMRC has estimated that the IR35 reform in the public sector has generated £410 million in additional revenue for the Treasury so far and that almost 86% of contractors have been affected by it.

How should I operate as a contractor?
If you are in business on your own account as a contractor, then IR35 won’t apply to you. However, it is important to be aware of the legislation in case you have to prepare a defence if you find yourself the subject of an HRMC investigation.

Because there’s a lack of clarity when it comes to IR35, it can be a challenge to decide which operating structure to choose. Seeking the services of a company that specialises in contractor accountancy can help you to figure out how to operate. Aston Black are here to answer all of your IR35-related questions. We can help you to protect yourself against IR35 and help you to mitigate the risk of being selected for an investigation.