Geoffrey Caesar, Solicitor

IR35 is a tax legislation that aims to prevent tax avoidance by workers who provide their services to clients through an intermediary, such as a limited or personal service company. IR35 affects contractors who do not meet HMRC’s definition of self-employment and who would be considered employees if they worked directly for the client.

The primary test to determine if you are inside or outside IR35 is whether you have a contract of service or a contract for services with your client. A contract of service implies an employment relationship, while a contract for services implies a business-to-business relationship. There are several factors that HMRC considers when assessing the nature of your contract, such as:

• Control: How much control does the client have over how, when and where you do your work? The more control they have, the more likely you are inside IR35.
• Substitution: Can you send someone else to do your work, or must you do it personally? The more personal your service is, the more likely you are inside IR35.
• Mutuality of obligation: Is the client obliged to offer you work, and are you obliged to accept it? The more mutual the obligation is, the more likely you are inside IR35.
• Financial risk: Do you bear any financial risk for your work, such as investing in equipment, paying for expenses, or facing penalties for poor performance? The more financial risk you take, the more likely you are outside IR35.
• Part and parcel: Are you integrated into the client’s organisation, such as having a staff email, attending meetings, or receiving benefits? The more integrated you are, the more likely you are inside IR35.

These factors are not exhaustive, and no single factor is decisive. HMRC will look at the overall picture of your working relationship with your client, and apply the “hypothetical contract” test. This means they will imagine what kind of contract you would have with your client if no intermediary was involved and see if it would be an employment or business contract.

To help you determine your IR35 status, you can use HMRC’s Check Employment Status for Tax (CEST) tool, which will indicate whether you are inside or outside IR35 based on your answers to a series of questions. However, this tool is not binding, and HMRC may still challenge your status if they disagree with the outcome.

If you are inside IR35, you will have to pay income tax and National Insurance contributions (NICs) as if you were an employee of your client. Your intermediary must deduct these amounts from your fees before paying them. You will also lose some tax deductions available to self-employed workers, such as travel expenses and home office costs.

If you are outside IR35, you will pay taxes and NICs as a self-employed worker. This means you can pay yourself a salary and dividends from your intermediary and claim tax deductions for your business expenses. You will also have more flexibility and autonomy in running your business.

IR35 can significantly impact your income and tax liability as a contractor. Therefore, it is important to understand the rules and assess your status correctly. You should also review your contracts regularly and keep evidence of your working practices to support your status in case of an enquiry by HMRC.

Do you need further assistance with IR35? I can review your working arrangements to assist with a determination and can draw up any contracts you may require, whether working outside or inside IR35.