INSIDE VS OUTSIDE OF IR35

Understanding the off-payroll working rules:

The off-payroll working rules were introduced to ensure that if an individual would have been an employee if they were providing their services directly, rather than through an intermediary, they pay broadly the same tax and National Insurance contributions as an employee.

What is the meaning of “Inside IR35”?

Being inside of IR35 means you’re seen as an employee for tax purposes by the client receiving your services. You will also be provided with something called a Status Determination Statement (SDS) to explain your employment status for tax purposes.

When you work through an umbrella company, you are automatically inside of IR35.

As a contractor working through an umbrella company and inside IR35, your taxes and other statutory deductions will be submitted to HMRC accordingly. 

What is the meaning of “Outside IR35”?

If your contract is not within the scope of the IR35, then you can pay taxes and receive tax relief via your own personal services company.

When you find yourself ‘outside IR35’, it means that you can pay yourself a salary, take the remainder of your income as dividends, and treat taxation in the usual way.

How is IR35 status determined? 

Determining the status of IR35 can be tricky. There are several factors that can affect your status. The following are some of the key tests used by HMRC when looking at employment statuses:

1. Right of Substitution
   Can a worker send someone else to do the job? If there is no possibility of another employee taking over, then this might indicate that you should be considered an employee and therefore fall inside of IR35.
2. Right of Control
   How much control does the client have over how you perform the job? People who are self-employed often decide when, where and how they work. But if you must work certain hours or perform in certain way to get the job done then this could indicate that the contract sits inside of IR35.
3. Mutuality of obligation
   Does the employer have to continuously offer tasks, and you have a duty to accept the tasks provided? If so, this is an indicator that the contract is inside of IR35.

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How can I make sure I comply with the legislation?

IR35 legislation is complex. To comply with IR35, clients and contractors should:

• Conduct thorough assessments on scope of works/ job descriptions, contracts and working practices
• Use HMRC’s Check Employment Status for Tax (CEST) tool, which may give an indication of employment status
• Seek professional advice to ensure compliance and understand the nuances of the legislation.