Your net income could be significantly lower if your contract work is subject to the IR35 rules.
The key to whether a contract is caught by IR35 or not lies in whether the individual carrying out the work would ordinarily be classed as an ’employee’ if an intermediary (a limited company) wasn’t in place.
Employment Status Rules
If selected for a tax compliance investigation, to determine whether an IT contractor/freelancer falls within the tax legislation, HMRC will look at his/her employment status when performing a given role.
As detailed in the long-archived HMRC ’employed or self-employed’ leaflet (called ‘IR56’ at the time), contractors deemed to be ‘self-employed’ are likely to be free from IR35, whilst those deemed to be ’employees’ are more likely be subject to the IR35 rules.
Broadly, you are self-employed if you are in business on your own account and bear the responsibility for the success or failure of that business, and employed if you personally work under the control of someone and do not run the risks of having a business yourself.
A contractor cannot elect to be ’employed’ or ‘self-employed’, as these terms are defined by the nature of the IT contract work undertaken.
As there are no formal definitions of such employment types in tax law, a number of ‘pointers’ are used to determine someone’s true employment status for a given role.
The following summary of HMRC’s IR56 leaflet provides some high-level pointers to determine if your current work may fall within the IR35 net.
The leaflet was originally published in 2008 and is no longer live, however the questions it contained (see below) are as pertinent today (in 2023) as they were then.
You are most likely to be an employee if you answer “Yes” to all of these questions:
- Are you required to carry out the work yourself?
- Are your hours or work fixed?
- Can someone else tell you what to do, and when/how to carry out the work?
- Can you be moved from one task to another?
- Are you paid on a regular basis (i.e. by the hour, week or day?)
- Are you eligible to receive overtime or bonus payments?
You are most likely to be self-employed if you answer “Yes” to all of these questions:
- In running your business, do you risk your own money?
- Can you hire other people to do work on your behalf, or hire helpers at your own cost?
- Do you use your own equipment to perform your work?
- Do you commit to carry out fixed-price work, regardless of how much time it may take to complete?
- Are you free to decide what work you do, and when/how you carry out the work?
- Do you work for a number of different clients or customers?
- Do you have to make good any unsatisfactory work at your own expense and in your own time?
Who decides your employment status?
When the IR35 rules were first implemented in 2000, it was up to each limited company contractor to effectively self-certify their employment status.
The rules were tightened up in 2017 and 2021 via the Off Payroll Working Rules.
These new rules make end-clients responsible for determining the employment status of workers, rather than contractors themselves.
The client provides its decision via a status determination statement.
The only exception to the Off Payroll rules is if you work for a small company in the private sector. Read more here.
Both the wording of your contract, plus the way you carry out the work (your ‘working practices’) must show that you’re truly working in business on your own account, rather than just a ‘disguised employee’ (an HMRC) term.
You can download the original HMRC IR56 leaflet (PDF) via archive.org.
For more in-depth information on IR35 compliance, try these useful guides:
For ultimate peace of mind and defence in the event of an IR35 investigation, take out Qdos’ award-winning IR35 insurance – from just £99 per year. This covers up to £50,000 of professional representation and potential tax liabilities up to your chosen level of indemnity.