IR35

IR35 represents a tax legislation aimed at distinguishing legitimate businesses from what is referred to as disguised employees. The focus is on personal service companies (limited company contractors) who may resemble employees of their end clients rather than providing authentic business-to-business services. The objective is to recover the additional PAYE tax and National Insurance Contributions (NICs) that these contractors would have paid if classified as employees.

When discussing IR35, we often use the terms “inside” and “outside” to describe your status. But what do these terms mean?

In brief, they indicate your IR35 status as either a bona fide contractor (outside) or an employee for tax purposes (inside). These terms depict whether you fall within the scope of the legislation or not.

Meaning of outside IR35
Being 'outside IR35' indicates that you are operating as a legitimate business and, as a result, not subject to the IR35 rules.
When you fall 'outside IR35,' you have the freedom to pay yourself a salary, receive the remaining income as dividends, and manage your taxes as you normally would.
In cases where you are engaged with the public sector or a medium-large private sector business, your end client takes responsibility for determining your status. If they classify you as 'outside IR35,' you will receive your fee as usual and retain the responsibility for handling your taxes.
However, it is important to note that even if you are operating outside the legislation, there remains a possibility of an IR35 enquiry from HMRC. These enquiries can be prolonged, lasting for a couple of years, and contractors, as well as end clients, may unknowingly encounter issues due to inexperience with HMRC inspectors. Some cases that appeared clear-cut have led to HMRC deeming the contractor to be inside IR35.

Meaning of inside IR35
Being 'inside IR35' means that, for tax purposes, you are regarded as an employee of your end client and are subject to PAYE (Pay As You Earn).
If you find yourself 'inside IR35,' it is crucial to ensure that the appropriate taxes are being paid, typically involving a 'deemed payment' of income tax at the end of the tax year (it's advisable to discuss this with your accountant). Additionally, it is important to have your status reassessed if there are changes in your working practices or when you enter a new contract.
In situations where you are engaged with the public sector or a medium-large private sector business, the fee-payer (often a recruitment agency) will deduct your tax and NICs at the source. However, some agencies and clients may not have the infrastructure to manage contractors through payroll, leading them to engage you through an umbrella company that acts as your employer (for a fee). You can learn more about the off-payroll rules in this context.
Should you be determined as 'inside IR35' following an IR35 enquiry, HMRC will raise a determination for the income tax, NICs, interest, and potentially a penalty that should have been paid during the relevant accounting period. This can amount to significant sums, potentially reaching tens of thousands of pounds.

IR35

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