Previously on IR35:
- The legislation informally known as IR35 was introduced 23 years ago. It aimed to prevent those billing via a limited company whilst performing an employee-style role for a customer from benefiting from any of a limited company’s tax advantages; instead they were to pay full employment taxes.
- It didn’t work, because it was self-assessed, and turkeys rarely vote for Christmas.
- In 2017, as a result, the responsibility for making the call changed - if you worked for a public body, the public body would decide if IR35 applied. If it did, full employment taxes would apply and you’d just be paid the net.
- In 2021 (having been postponed for one year due to COVID), this was extended to large customers - similarly, it became their call on IR35 and their risk if they decided not to account for employment taxes.
If you’re a contractor or freelancer working longish projects with big or public sector customers, it’s therefore quite likely you’ll encounter IR35 these days. But, if a customer or agency tells you that a contract is inside IR35, what does this mean to you in practice? This isn’t necessarily a simple question, as there are a number of routes that the customer may take, with the literal implementation of the IR35 rules being the least common by far:
- They might just put you on PAYE.
- They might pay you via an umbrella company (from your point of view, this is to all intents and purposes exactly the same as PAYE).
- They just might actually implement the IR35 process - we don’t see it often, but we do see it occasionally. If they do, then you’ll send them invoices from your limited company as normal, but they’ll pay the invoices net of tax and National Insurance relating to you personally. This is obviously a very weird concept, and since all three routes are designed to get to the same split of the money between you and HMRC, the well-worn road of PAYE/umbrella generally looks much more appealing to all concerned.
If you get the choice, your accountant will thank you for picking #1 or #2! We don’t need the hassle of #3 either.
Here are three practical points to be aware of:
- Make sure you know whether a contract is inside or outside IR35 before you sign it!
- Be aware that an inside IR35 contract will leave you with less money in your pocket than an outside IR35 one. How much less? That will vary depending on the bigger picture of your whole situation, but as a rule of thumb you might consider that you’d need a 25% day rate hike to stand still.
- You should talk to your accountant at the outset of the new gig, not later on down the line - as well as the decision on whether to accept the contract, there will very likely be other actions to take too. It might well be appropriate to pause salary or dividends from your own company whilst working on an inside IR35 contract, and that can’t legitimately be done retrospectively.
It’d be nice if everyone had a common understanding of what inside IR35 means, and the steps we’ll all take when that’s the case. Until then, you’ll always need to press until you find out what’s actually going to happen in practical terms.
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