What is IR35?
IR35 rules can be complicated, so it’s important that contractors are clued up.
IR35 meaning IR35 is another name for the off-payroll working rules. The term ‘IR35’ refers to the press release that originally announced the legislation in 1999. Self-employed IR35 rules are designed to work out whether a contractor is someone who’s genuinely self-employed rather than a ‘disguised’ employee, for the purposes of paying tax. That’s because contractors who set up and work through a limited company enjoy some tax efficiency.
While they don’t usually get employee benefits (like holiday and sick pay), they have flexibility and control over their work. Some contractors try to take advantage of this tax efficiency by appearing self-employed on the surface, when they’d be an employee were they not providing their services through their limited company. The off-payroll working rules are designed to tackle this, but they aren’t without their problems.
When a contractor is a ‘disguised’ employee, they’re taking advantage of the tax efficiency of working through a limited company, but otherwise they should be classed as an employee.
Consider the example of an employee who quits their job, leaves on the Friday, and starts back at the company in the same position on the Monday, but as a contractor working through their limited company. Has the arrangement changed in any material way? ‘Disguised’ arrangements benefit employers too because they don’t have to pay employers’ National Insurance contributions (NICs) or give any employee benefits to contractors.
So self-employed IR35 rules tackle those arrangements by testing the contract itself, working out whether it’s ‘inside IR35’ or ‘outside IR35’:
• If your contract is inside IR35, it points towards employment. HMRC sees you as an employee and you face an income tax and National Insurance burden, just as employees do
• If your contract is outside IR35, it points towards self-employment, and you can enjoy the tax efficiency that self-employment brings (as well as all the associated risks)
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