What Is IR35 In The UK? Do The Rules Apply To You?

Understanding tax laws can feel overwhelming, but some rules directly impact how you work and get paid. One such rule is IR35. If you’re a contractor, freelancer, or work through a limited company, the term IR35 might already be on your radar. But what does it really mean? Let’s break it down in simple terms.

But before that, if you wish to speak to an expert accountant who would love to be your guide and help you with personalised accounting service in the UK, we are here. Call 01706 225 617 to discuss your queries and concerns, and we’d make things (including IR35) simple for you!

What Is IR35 In The UK?

IR35, also known as the “off-payroll working rules“, is a tax legislation introduced to ensure that individuals working like employees but through an intermediary – like their own limited company – pay similar taxes to regular employees. Essentially, it’s designed to tackle tax avoidance.

If you’re a contractor working through a personal service company (PSC), IR35 determines whether you’re genuinely self-employed or operating as a disguised employee to reduce tax liabilities.

Why Was IR35 Introduced?

HMRC introduced IR35 legislation in the UK in April 2000 to prevent “disguised employment.” This happens when someone operates through a PSC but performs work that resembles a permanent employee’s role. Without IR35, contractors could potentially pay less tax than employees by taking dividends instead of a salary.

How Do The IR35 Rules Work In The UK?

Under IR35 compliance in the UK, contracts are assessed to determine if they fall “inside IR35” or “outside IR35.”

• Inside IR35: You’re considered an employee for tax purposes. You’ll pay Income Tax, National Insurance Contributions (NICs), and potentially employer NICs. This status significantly reduces your take-home pay.
• Outside IR35: You’re genuinely self-employed and can take advantage of associated tax benefits. This includes paying yourself via dividends, which can lead to more tax efficiency.

HMRC assesses contracts using several key tests:

• Control: Does the client dictate your working hours, location, and tasks? Higher control from the client suggests employment.
• Substitution: Can you send someone else to do the work instead of completing it yourself? Genuine contractors can usually provide a substitute.
• Mutuality of Obligation (MoO): Is the client obliged to offer work, and are you obliged to accept it? A continuous obligation indicates employment rather than self-employment.

Contractors must ensure their contracts reflect self-employed status and demonstrate independence from the client.

Who Is Responsible For Determining IR35 Status?

The responsibility for determining IR35 status depends on the sector and the size of the hiring business:

• Public sector: The end client must assess whether a contractor’s role is inside or outside IR35. They are responsible for ensuring the correct taxes are paid if the contractor falls inside IR35.
• Private sector (medium and large businesses): From April 2021, medium and large businesses became responsible for assessing contractors’ IR35 status and applying the appropriate tax deductions for inside IR35 contracts.
• Small private businesses: If the hiring company qualifies as small (based on turnover, balance sheet, and employee count), contractors retain responsibility for assessing their own IR35 status and paying the correct taxes.

How Have The IR35 Rules Evolved In Recent Years?

The IR35 rules have undergone significant changes to tighten compliance:

1. Public Sector Reform (2017)

Public sector organisations became responsible for determining contractors’ IR35 status. This shifted the tax liability from contractors to the hiring organisation.

2. Private Sector Reform (2021)

Medium and large businesses in the private sector now bear the responsibility for assessing IR35 status and ensuring tax compliance. This change aimed to prevent tax avoidance and brought the private sector in line with public sector rules.

3. Double Taxation Consultation (2023)

On 27 April 2023, the UK Government addressed the ‘offset issue’ – a double taxation problem under IR35. Currently, if HMRC overturns an ‘outside IR35’ determination, the employer must pay Income Tax and NICs even though the contractor’s limited company has already paid taxes.

The new offset rules, proposed for implementation from 6 April 2024, aim to prevent double taxation by allowing HMRC to estimate the correct tax difference and avoid overpayment.

4. 2024 Updates

Recent changes focus on clarity and fairness. Enhanced compliance checks by HMRC and improved guidance aim to make the rules easier to follow while ensuring fair tax practices. These updates include implementing the offset rule to resolve longstanding double taxation challenges.

How To Stay Compliant With IR35 Rules

Navigating IR35 rules in the UK can be tricky, but here are some detailed tips to remain compliant:

• Review your contracts thoroughly: Ensure contracts clearly outline your independence. Avoid clauses that suggest you are under the client’s direct control or obligated to accept ongoing work.
• Seek professional advice regularly: Consult an accountant or tax specialist experienced in IR35 compliance. They can help you structure contracts and working arrangements to avoid falling inside IR35.
• Use HMRC’s CEST tool cautiously: While the tool provides guidance, it has limitations. Cross-check results with professional advice to ensure accuracy when determining your IR35 status.
• Keep detailed records of work: Maintain evidence that supports your self-employed status, such as invoices, contracts, and correspondence showing independence and control over how work is completed.

Need Help? Carter Collins & Myer Is Here For You!

Tackling IR35 compliance can be daunting, but you don’t have to do it alone. At Carter Collins & Myer, we simplify accounting and tax complexities so you can focus on what you do best.

Our team of expert accountants offers tailored services for contractors and freelancers, helping you:

• Navigate IR35 compliance in the UK
• Handle payroll and self-assessment tax returns
• Maintain accurate financial records
• Optimise your tax efficiency

With decades of experience, we ensure you stay ahead of deadlines and avoid penalties. Whether you need help understanding IR35 or managing your finances, we’ve got you covered.

Contact us today to schedule a consultation. Let us handle the intricate details so you can focus on growing your business.