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What are the IR35 rules? Concise guide for contractors

The notorious IR35 legislation takes its name from a 1999 Inland Revenue press release, ‘Countering Avoidance in the Provision of Personal Services’.

Its aim was to ensure that individuals did not leave permanent jobs only to continue working in a similar way, but via limited companies (intermediaries) to save tax.

Contractors working via limited companies don’t pay national insurance (NICs) on their dividend income – resulting in a revenue loss to the Treasury.

The IR35 rules became law via the Finance Act 2000 (Schedule 12).

You can read more about how IR35 came into force in our history of IR35 guide.

The fundamentals behind the IR35 rules

IR35 was invented to clamp down on the widespread use of personal service companies by individuals who would otherwise be classed as ’employees’ according to their work practices.

Employees pay NICs on their salaries, and employers’ NICs are also payable. If a limited company contractor takes a modest salary and the remainder of his income as dividends, there may be no National Insurance liability at all.

In order to work out if an individual’s contract is subject to IR35 or not, a complex series of employment status rules exist to determine whether or not a person would be ’employed’ or ‘self-employed’ for tax purposes.

You can read more about the implications of your employed status in our guide to IR35 compliance.

For example, a contractor who works on a client site under the direct supervision of his client, using the client’s equipment, and the staff facilities, is likely to be deemed to be ’employed’ under the self-employment rules.

However, a freelancer who works from home can provide a substitute if he is unavailable, and has multiple clients, is far more likely to be deemed as ‘self-employed’ and therefore free from the burdens of IR35.

It is important to note that, when assessing a contractors’ IR35 status, HMRC will consider his working practices as well as the terms of the contract itself. The IR35 rules apply to the contract itself, not the individual.

It may be possible for an individual to work on several contracts during a given period of time, and for just some contracts to fall within the IR35 net.

What about the Off Payroll rules?

The Off Payroll rules were implemented in the public sector in 2017 and private sector in 2021.

If you work for a client who isn’t classed as a ‘small business’, then the client is now in charge of working out your employment status and issuing you with a Status Determination Statement (SDS).

Before the introduction of these new rules, contractors themselves were in charge of self-certifying their IR35 status.

What if you are caught by IR35?

If your contract is caught by IR35, you will draw most of your income in the form of a deemed payment; if your client is a ‘small business’, you can claim a 5% ‘expense allowance’ to cover the administrative costs of running your company.

Unfortunately, this small concession is only available to a small number of contractors as a result of the Off Payroll rules.

Although you may still be better off contracting via a limited company under IR35, many contractors caught by the rules join umbrella companies for a hassle-free way to contract.

In many cases, clients prefer not to hire limited company contractors due to the complexities of the Off Payroll rules. In such cases, you might have no choice but to work via an umbrella company.

IR35 contract reviews and investigation insurance

There is a significant difference in take home pay if your contracts are caught by IR35, so we strongly recommend you use an IR35 contract review service before signing a new contract.

You might consider taking out IR35 insurance just in case you need professional representation following an HMRC status review. Annual cover costs as little as £99 per year.

Protect yourself against an HMRC IR35 investigation

Award-winning Qdos IR35 insurance – from just £99 per year. Covers £50,000 of legal costs + outstanding tax liabilities if you opt for TLC35. Contract review service also available.

Last updated: 21st April 2023