What is IR35? Does it apply to your contract? A concise guide to IR35.
A breakdown of IR35 and the key elements you need to know
What is IR35?
IR35 is a piece of government legislation created to help distinguish genuinely independent contractors from those who are essentially disguised employees. IR35 was introduced by HMRC in 2000 to tackle the problem of contractors working full time via their PSC to gain tax advantages.
What about status?
Every contractor’s IR35 ‘status’ effectively determines their tax position with HMRC. End hirers are now required to scrutinise the roles and responsibilities of every contractor they hire according to the rules laid down within IR35.
The outcome of a SDS completed by the hirer will determine whether a contractor is genuinely independent and bearing the risk of self-employment – and therefore entitled to tax advantages – or if they are essentially performing the role of a PAYE employee. If a contractor’s relationship with their end hirer falls inside IR35, they will be taxed according to PAYE. If it falls outside, they will be taxed as a Limited Company, where they can primarily withdraw funds as dividends and ultimately have a much better take home pay.
Is there anything I need to pay attention to?
Now, the right thing for end hirer to do is to assess the contract role and then produce an SDS but is what we have seen is a lot of end hirers have actually put a blanket ban in place and made the decision to simply just not take on any Limited company contractors and will only take them on via a PAYE solution (effectively an umbrella solution). This can lead to the end client losing the best talent on the market as those Limited Company contractors may just look elsewhere for outside of IR35 roles where the client has fairly assessed each contract role.
With special thanks…
We would like to thank Brookson Legal Services (an SRA Regulated law firm that focuses on IR35 and out experts) for their contribution to this useful IR35 breakdown. Should you wish to find out more, why not explore Brookson’s recorded webinar on IR35?