Your net income could be significantly lower if your contract work is subject to the IR35 rules.
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 his/her ’employment status’ when performing a given role.
In essence, as stated in the now-archived HMRC ’employed or self-employed’ leaflet (formerly called ‘IR56’), those IT contractors deemed to be ‘self-employed’ will be free from IR35, whilst those deemed to be ’employees’ will most likely be subject to the IR35 rules.
A contractor cannot elect to be ’employed’ or ‘self-employed’, as such definitions 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.
Alongside our more in-depth IR35 employment status overview, 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.
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?
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