What is IR35 and how to determine if you're inside or outside?

What is IR35 and how to determine if you're inside or outside?

The UK’s Off Payroll Working Legislation, also known as IR35, is designed to ensure that individuals working through their own limited company, or another type of intermediary, pay the right amount of tax. If you’re a contractor, self-employed worker or agency staff, it’s important to have a basic understanding of this legislation, as you may find that by taking up a new contract, placement or job, the end client you’re doing work for becomes responsible for ensuring you’re taxed correctly. Here’s what you need to know about IR35 and what it means for you.

What is IR35?

IR35 legislation is a set of rules that ensures those who work as employees but through their own limited companies or personal service company (PSC) pay a comparable level of income tax as those employed directly. With some individuals providing their services through one of these structures, the responsibility falls on the end user or client to ensure that the individual pays the right amount of tax and national insurance contributions.

First introduced in 2000, the legislation distinguishes between individuals who are ‘inside’ IR35, whose tax deductions are made at source through PAYE, and those who are ‘outside’ IR35 and who are able to calculate their own deductions. In short, the legislation shores up the ‘role’ of contractors working for a client by assessing whether they are closer to being a self-employed worker or an employee.

Previously, contractors were able to decide their own IR35 status. But to ensure better compliance with tax legislation and to create a more streamlined process, the government introduced changes that shifted responsibility for deciding a worker’s status to the client, or end user. These changes had first been introduced in the public sector in 2017 and were extended to medium and large businesses in the private sector in 2021. Whilst those working through an umbrella company, for example, were not directly impacted by the changes, some individuals working through a limited company – who were previously outside IR35 – found that their status had changed.

How can you determine if you are inside or outside IR35?

Not everyone is affected by IR35. The changes in 2021 rolled out the new classifications of being inside or outside IR35 to the private sector, whilst healthcare professionals working in the public sector have been subject to this legislation since 2017, and employees in smaller organisations – defined as having an annual turnover no larger than £10.2 million, no more than 50 employees and assets totalling no more than £5.1 million – are exempted.

The bulk of the changes concerned limited companies. With the onus shifting to the end user to decide on contractors’ contractual status, some workers found that theirs had changed in terms of IR35. This also sometimes resulted in uncertainty about how parties could find out their status.

Whether you start work on a new contract, or are subject to a change in contracting status, your end user will make an assessment of your status. Once this assessment has been made, they should provide you with a status declaration statement (SDS) that confirms whether you are inside or outside IR35. With this document, they should also give a justification behind the reasoning, so if your status has changed or you want to enquire about your status, it’s vital you keep hold of this document. If you haven’t received an SDS, you can ask your end user for one.

If you’re still not sure, or are wondering what your status will be if you take up a new role, the government’s online CEST tool helps end users and agency staff figure out what their status might be. You will need to give a broad overview of the work that you will carry out, your responsibilities, and how you will be paid, after which you should be given an indication of your status. However, this tool has not always led to conclusive results, so if you still aren’t sure about your status, you could speak to a legal adviser. Or, if you work via a recruitment agency, such as Medacs, you could speak to a member of the Financial Compliance team who will be able to help you.

How does IR35 impact limited and umbrella companies?

As an individual working through an umbrella company, your tax and national insurance is already deducted at source, so you don’t need to worry about IR35.

If you’re deemed to be inside IR35, your end user will need to make the necessary deductions from the fee for your work before payment is made as your status is closer to being an employee of the end user. If you’re outside, you will need to take steps to accurately calculate your deductions as you’re equivalent to being self-employed. You should make sure that you are able to prove your status in case of an IR35 enquiry, which can last for long periods of time. Make sure you keep hold of all invoices, records of employment, details of any registered offices and any other important documentation or information relating to your work in case of such an enquiry, and in order for your limited company to meet compliance requirements.

Find out more

You should now have a better idea of how the IR35 rules work, but if you need more guidance or information on what these rules mean for you, find out more in our IR35 support guide, or contact our Finance Compliance team.