IR35, also known as the off-payroll working rules, can seem complex. This guide breaks down the essentials for UK contractors.
What is IR35?
IR35 legislation is designed to assess whether a contractor is genuinely self-employed for a particular engagement or if they are, for tax purposes, an employee of their client – often referred to as a 'disguised employee'. For detailed official information, you can refer to the HMRC guidance on understanding off-payroll working (IR35).
If a contract is deemed 'Inside IR35', the contractor (and their client/agency) must pay income tax and National Insurance Contributions (NICs) similar to an employee. If it's 'Outside IR35', the contractor can typically operate more tax-efficiently through their limited company.
Inside IR35 vs. Outside IR35
Inside IR35
This means HMRC considers your working arrangement to be akin to employment.
- Income is subject to PAYE (Pay As You Earn) – Income Tax and Employee NICs are deducted at source.
- Employer's NICs are also payable (usually by the fee-payer, which could be the client or agency).
- Typically paid via an Umbrella company or agency payroll.
- Fewer allowable business expenses.
Outside IR35
This means HMRC agrees that you are genuinely operating as a self-employed business for this contract.
- You can receive gross payments to your limited company.
- You are responsible for your own taxes (Corporation Tax, Income Tax on salary/dividends, NICs). This involves careful tax planning.
- Greater flexibility in tax planning and potential for higher take-home pay.
- Wider range of allowable business expenses.
Key Factors in Determining IR35 Status
HMRC (and clients assessing status) look at several factors. No single factor is decisive; it's about the overall picture of the working relationship. Key areas include:
- Control: How much say does the client have over how, when, and where you do your work? The less control the client has, the more likely it is Outside IR35.
- Substitution: Can you send a substitute to do the work in your place? A genuine right of substitution (and using it) points towards being Outside IR35.
- Mutuality of Obligation (MOO): Is the client obliged to offer you work, and are you obliged to accept it? A lack of MOO (i.e., project-based work rather than ongoing employment-like work) supports an Outside IR35 status.
- Financial Risk: Do you bear financial risk like a typical business (e.g., correcting errors at your own cost, investing in your own equipment)?
- Part and Parcel: Are you integrated into the client’s organization like an employee (e.g., having a line manager, performance reviews)?
HMRC provides a tool called Check Employment Status for Tax (CEST) which can be used, but its results are not binding and it has faced criticism. It's often advisable to seek professional advice or a contract review.
Who Decides IR35 Status?
For medium and large-sized private sector clients, the responsibility for determining IR35 status lies with the end client. For small private sector clients, the contractor's limited company (PSC) remains responsible. In the public sector, the public authority is always responsible.
It's crucial to understand your IR35 status for each contract. If you're unsure, seeking professional advice is recommended. You might also consider IR35 insurance. Our guide on comparing UK tax bands can also be insightful.