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You’ve probably heard of IR35 by now. But it’s just as likely that some of the details still seem a bit murky.
We’ve put together this article (and a full, in-depth downloadable guide) to guide you through the complicated tax legislation that is IR35. In it, we’ll focus on what it means to work ‘inside IR35’, and what you can do about it.
In simple terms, working inside IR35 means that the service you provide is deemed by HMRC to reflect a service of employment, not self-employment.
That means you’re likely to be taxed more, given that contractors operating inside the rules are considered employees for tax purposes.
But who is responsible for deciding if a contract is inside or outside of IR35? Well, this depends on what sector you work in. Since 2017, for assignments with public sector organisations, the responsibility for assessing IR35 status sits with the public sector organisation as the end user of your services. For private sector engagements, the responsibility remains with the contractor until 6th April 2021 when the reforms to off-payroll working (IR35 reforms) take effect. Post 6th April 2021 the responsibility for assessing the IR35 status of an assignment will sit with the end hirer in both the public sector and private sector.
That said, if your end client falls under the taxman’s definition of ‘small’ , it will be your responsibility to set your own tax status from next April.
The impact of an inside IR35 assessment depends on whether you are working in the public or private sector.
Public Sector – The responsibility for determining IR35 status sits with the end hirer
Here are the details of what will be expected of you when working inside IR35 :
Private Sector – The responsibility for determining IR35 status sits with the contractor (until April 2021):
Although the legislation can sound scary, it doesn’t necessarily mean you shouldn’t work through a limited company inside IR35, as there are still many benefits.
Obviously, there are more tax benefits if you are working outside IR35 (which is fair enough considering the increased burden), but just because a specific contract is inside it doesn’t mean you should immediately turn to other solutions.
There are still quite a few benefits to operating inside IR35 and working through a limited company rather than using an umbrella company (more information on umbrella companies later). Here are a few:
If you are working in the private sector, when calculating the ‘deemed salary’, certain expenses can be deducted from your contract income. To be clear, the following expenses have been mentioned by HMRC in various consultations and FAQ publications:
Earlier, we discussed the merits of choosing to stay as a limited company if inside IR35. But, if you don't feel it's right for you, then an umbrella company might be the way to go—but what though does that actually mean?
With the right umbrella company, it can be a stress- and hassle-free way of getting paid whilst you contract. A compliant umbrella company will become your employer. They will ensure that you are paid a salary in line with the terms of that contract with your agency or end hirer, and make the necessary deductions and payment of PAYE and NIC.
Employees of an umbrella company will get all the benefits and protections of employment, such as a workplace pension, holiday pay and maternity/paternity pay, amongst other employee benefits, whilst still retaining all the freedom of contracting.
As a contractor, you may find that assignments vary in their IR35 status meaning that you may decide to work flexibly between your limited company and umbrella employment. SJD Accountancy can help you to stay agile via our margin free umbrella employment service which is available on the majority of our packages.
Got a contract that you think might fall inside IR35? Take a look at our IR35 Contract Review Service.
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