One minute guide to IR35

Army of Lawyers

IR35 is an HMRC tax law designed to increase government tax revenues. It prevents contractors avoiding tax. Contractors could benefit financially if their contract was outside of the IR35 laws.

This is because they could take a proportion of their income as a dividend and so avoid an element of tax. The IR35 tax law, which has been around for over ten years, covers most contractors in the UK. This means that a contractor gets less tax breaks than they used to get before IR35 came into effect.

100%

Contractors now have to PAYE all their contract earnings (apart from legitimate business expenses). In order to remain outside IR35 legislation contractors must establish whether they're working as 'self employed' or 'employed' for tax purposes.

Maybe I Can Get Away With It?

It is true to say this is both a hotly contested area of tax law and also a very grey area where no hard and fast rules have been established - despite the best attempts of the legal profession.

Whilst confusion reigns the only winners are the lawyers.

Many within the contracting industry blame the government for badly written legislation which does not clearly and absolutely define what a contractor can, and cannot, do to trade legitimately concerning IR35.

Mind the Gap

There are too many gaps (as identified by the legal profession) encouraging contractors to think ‘Maybe I'm not caught...' and ‘Maybe I can get away with it...' Because the legislation is unclear doesn't detract from the reason why the law was introduced in the first place, and ultimately the principal behind IR35 remains in force.

Here's a brief way of working out whether you are caught by IR35, and if so using the services of an umbrella company will be your best option. It's by no means comprehensive - for that you'd need to be able to understand complex tax/employment legislation or hire an expert employment lawyer to figure out your tax status.

• Though bear in mind this doesn't always guarantee a definitive answer.

IR35 is designed to prevent companies taking on 'disguised' employees. A disguised employee would be an individual who is in every respect working like an employee but trading as a contractor in order for both them and the company to pay less tax.

Real Deal

A genuine contractor would work, and be treated by the company, differently to an employee. A genuine contractor would probably have

1. Their own office
2. Business cards
3. Letter headed paper
4. Accountant/lawyer
5. Advertise for business
6. Other employees

SME

You would be running your own small business. You would provide your own equipment, like a PC.

As a genuine business you would negotiate and be paid in terms of a fully completed contract and not on an hourly rate. If you make a mistake you would have to correct the errors without incurring further cost to the company.

You have to complete the contract as agreed at the outset, even if you have to work additional hours which would eat into your profit - you may even make a loss.

Overview

If this is the way you work then you're likely to be outside IR35 which means a proportion of your income could be taken without being fully taxed. This may mean running your own limited company is your best option. But if you turn up to the client's office and, for example,

1. Only use their equipment (eg PC)
2. Have the client's manager check your work and tell you what you should be doing
3. Cannot send in a different person to do the job
4. Do the same/similar job to the client's permanent employees

Guide Only

This is intended purely as an overview of IR35 and in no way meant to be relied on by a contractor determining what tax they should be paying!

If you're in any doubt - join an umbrella company. An umbrella company is specifically designed for busy contractors who want a tax efficient solution without any paperwork, administration or hassles. An umbrella company has no long term tie-ins and is easy to use.

 1. What is contracting and how can I become a contractor?
 2. You've got the contract, what now?
 3. What is an umbrella company?
 4. Umbrella company myths
 5. Umbrella company FAQs
 6. Umbrella company paperwork
 7. Umbrella company expenses
 8. Calling an umbrella company
 9. 10 questions to ask your umbrella company
10. IR35
11. Paying Employer's National Insurance
12. Choosing an umbrella company
13. Umbrella company alternatives