Understanding IR35

There is no denying the topic of IR35 is complicated and when setting up as a Limited company contractor often one of the first questions you’ll ask is - what is IR35? and am I affected by it? For example when doing a rough calculation for take home pay you need to know if your contract falls inside or outside of IR35.

IR35 legislation was introduced in April 2000 to prevent what HM Revenue and Customs (HMRC) class as disguised employment.

A prime example of disguised employment would be if you were to leave your permanent position on a Friday and return to the exact same role at the same desk on the Monday, the only difference is you are now a Limited company contractor running your own Limited company not a permanent employee. More often than not you will still be getting permanent employee benefits such as: performance based bonuses, holiday pay and sick pay.

IR35 legislation was brought in to tackle this issue and ensure that all Limited companies operate with the same risk, accountability and responsibility. Therefore if your contract and working practices do have the same level of risk, responsibility, liability and control as a permanent employee, you will in all likelihood be classed as inside IR35. If your contract is classed as being inside IR35 you would have to pay full tax and National Insurance and reduced expenses.

There are still numerous financial benefits working inside IR35, as you can claim expenses for travelling and accommodation. You only pay tax on 95% of your income, 5% of your income is intended to help you with the running costs. You can also benefit from the flat rate VAT scheme which could save you up to £2,000 a year and gain interest on any funds in your business bank account.

Is my contract inside or outside IR35?

It’s recommended you speak to a specialist contractor accountant to determine the status of your contract as there is so many factors to take into consideration, examples as below:

  • Could you hire someone else to help you with the work or could you hire someone else to do your job say if you were ill?
  • Do you have financial risks to take?
  • Do you provide your own equipment? However in some contracts due to security risks it’s common to have to use equipment provided by the end client, this will not affect your IR35 status.
  • Is your contract on a fixed fee? This could be a daily rate or a fixed contract rate?
  • Do you have more than one client or regularly change clients?

If you have answered yes to all of the above HRMC consider you to be working as self-employed which would suggest your contract is outside of IR35.

Article supplied by SJD Accountancy – Specialist Contractor Accountant


Visit ContractorUK for further information on IR35