Geoffrey Caesar, Solicitor

If you are a contractor providing your services through your limited company or another intermediary, you may have heard of IR35. But what is it, and how does it affect you?

IR35 is a shorthand term for the UK tax legislation that aims to prevent contractors from working as ‘disguised employees’ and avoiding paying the appropriate tax and National Insurance contributions (NICs). The legislation is also known as the ‘off-payroll working rules’ or the ‘Intermediaries Legislation’.

The IR35 rules apply if you would have been an employee of your client if you were not working through your intermediary. In other words, if you are working like an employee, you should pay tax like an employee.

The IR35 rules changed on 6 April 2021 for contractors who work for medium or large-sized clients outside the public sector and for contractors who work for public authorities. The changes mean that the responsibility for determining your employment status for tax purposes has shifted from you (or your intermediary) to your client. Your client must provide you with a Status Determination Statement (SDS) explaining their decision and its reasons.

If your client decides you are inside IR35, they (or the agency or other supplier that pays you) must deduct Income Tax and NICs from your fees and pay them to HM Revenue & Customs (HMRC). You will also have to pay the Apprenticeship Levy if applicable. You can no longer claim certain expenses, such as travel and subsistence costs, as tax deductions.

An inside IR35 determination can significantly adversely affect your net income as a contractor.

If your client decides you are outside IR35, you can continue operating as before and pay yourself a salary and dividends from your limited company. You will still be responsible for paying your Income Tax and NICs, as well as Corporation Tax and VAT if applicable.

If you disagree with your client’s decision, you can challenge it by following their disagreement process. You should provide evidence to support your case, such as your contract, invoices, timesheets, or testimonials from previous clients. You can also use HMRC’s Check Employment Status for Tax (CEST) tool to check your status.

It is essential to understand the IR35 rules and how they affect you as a contractor in the UK. The rules are designed to ensure fairness and compliance in the tax system, but they can also have significant implications for your income and expenses. If you are still determining your status or need more information, I can provide guidance and draw up contracts for working outside or inside IR35.