As a contractor, your contract is either classed as inside or outside IR35.
Working inside IR35 effectively means that you provide your services to a client in a manner that reflects employment, meaning you’ll be taxed as an employee for that contract. Read our guide to learn more about the ins and outs of operating inside IR35.
But what about outside IR35? What does working outside of IR35 mean? Well, let’s take a look…
What is IR35?
To tee things up, let’s start by defining IR35. The Intermediaries Legislation, better known as IR35, aims to identify if a contractor carries out their work as a self-employed individual or in a way that reflects employment – hence the phrase ‘disguised employment’.
HMRC’s thinking is that contractors who act and work like employees should pay tax like an employee – cue the introduction of IR35 in 2000.
What does outside IR35 mean?
If you work outside IR35 you are considered a genuine contractor and truly self-employed. By this, we mean that your contract and working practices (how you provide your services day-in-day-out) reflect that of a business. This is known as holding a contract for service, rather than a contract of service, the latter of which is how employees and contractors working inside IR35 are engaged.
What is the financial impact of working outside IR35?
Financially speaking, working outside IR35 means you will not be liable for Income Tax and National Insurance Contributions at the rate of employment. You will be paid in gross by your client, able to withdraw funds from your business in a way that suits you and responsible for paying your own tax – just like any other small business owner.
Explained differently, working outside IR35 means you pay tax as a self-employed person. Working inside IR35 means you’ll be taxed as an employee for that contract.
To find out how working outside or inside IR35 could affect your take home pay after tax, visit our Contractor Salary Calculator.
How to stay outside IR35
A question often asked by contractors is, ‘how do I stay outside IR35?’ There are a number of ways to protect your outside IR35 status, which we’ll run through now:
- Control – when it comes to outside IR35 engagements, the client shouldn’t have control over the service you provide and how it’s performed – whether that’s deciding where you work from, when you work and managing the service delivery. It’s therefore important that you can demonstrate you are not controlled by your client and have autonomy.
- Mutuality of Obligation (MoO) – this is the mutual obligation someone has to accept paid work and the obligation that a business has to provide it. MoO shouldn’t exist in outside IR35 contracts. Ways to demonstrate this include; having project start and finish dates, amending your contract if the work evolves and even turning down work.
- Personal service – the thinking here is that if a business sent, let’s say, a plumber to fix your tap, would you care if it was John, Amy or Dave? Or does it only matter that the job gets done to the standard you expect? The same theory can be applied to contractors working outside IR35. The service you provide shouldn’t be personal – from you the contractor – it should be delivered by your business. This is why many outside IR35 contracts include the right of substitution, which allows you to send in another contractor should you not want or be able to perform it yourself.
In addition to these three key status tests, contractors can demonstrate they belong outside IR35 by showing that they are a genuine business and not part and parcel of the client’s organisation – this includes having a company website, taking out business insurance and being liable for any mistakes made when doing the work.
Is my contract inside or outside IR35?
Unfortunately, it’s not always black and white. This is because there are a number of factors to take into account when assessing if a contract is inside or outside IR35. As a result, contractors, and following the introduction of IR35 reform, businesses, often engage the help of specialists to make sure a compliant decision has been made.
Are umbrella companies outside IR35?
If you work through an umbrella company, the IR35 rules do not apply to you. The reason for this is a simple one – umbrella workers are employees of the umbrella company and the IR35 legislation only impacts individuals providing their services via their own limited company, also known as a Personal Service Company (PSC).