Are you a contractor, consultant, coach, or freelancer in the UK?
If so, you’ve likely heard of IR35, but understanding IR35 is another problem. What exactly is it, how does it affect you, and what do you need to understand to ensure you don’t fall foul of IR35 when picking your next contracting or consulting role? 🤯
Let’s (try to) break it down in simple terms 👇🏽
What is IR35?
IR35 is a set of tax rules introduced to combat tax avoidance:
- by individuals supplying their services to clients via an intermediary, such as a personal service company (PSC)
- by employers taking on ‘contractors’ to fill regular positions and thereby avoid paying employer National Insurance Contributions (NICs) and other benefits
Essentially, it aims to determine whether a worker is genuinely self-employed or an employee in all but name.
If caught ‘inside’ IR35, the worker is considered a “disguised employee” and must pay income tax and National Insurance Contributions (NICs) accordingly.
Who Does IR35 Affect?
IR35 primarily concerns contractors, consultants, coaches, and freelancers who operate through their own limited companies or PSCs.
The legislation is relevant whether you’re working in IT, marketing, coaching, or any other field.
If you provide services directly to clients but receive payments through a company structure, IR35 could apply to you.
How is IR35 Status Determined?
Determining IR35 status can be tricky. HMRC looks at several factors, including:
- Control: Does your client dictate how, when, and where you work?
- Substitution: Can you send a substitute to do your work, or must you do it personally?
- Mutuality of Obligation (MOO): Is there an ongoing obligation for the client to provide work and for you to accept it?
These factors help establish whether you are effectively an employee (inside IR35) or genuinely self-employed (outside IR35).
Have there been any changes to IR35 in 2024?
As of the 2024-25 tax year, the responsibility for determining IR35 status remains with the end client for medium and large businesses in the private sector. However, for small businesses, this responsibility falls on the individual contractor.
If you’re caught by IR35, you must pay employment taxes, which can significantly reduce your take-home pay.
How Can You Protect Yourself?
To protect yourself, consider the following steps:
- Review Your Contracts: Ensure they accurately reflect your working relationship and include clauses for substitution, control, and MOO.
- Keep Documentation: Maintain evidence of your business activities, such as invoices and marketing materials, to support your self-employed status.
- Seek Professional Advice: An accountant or tax advisor can help you navigate the complexities of IR35 and ensure you’re compliant.
Need More Help?
Navigating IR35 can be challenging, but understanding the rules is crucial for avoiding unexpected tax bills.
For personalised advice, consider consulting with a solicitor who specialises in contractor accounting to review not only your contract, but also your working practices.
Also, stay updated with HMRC guidelines and utilise the Check Employment Status for Tax (CEST) tool
In conclusion, understanding IR35 and staying on the right side of IR35 is essential for protecting your income and avoiding penalties.
Keep yourself informed, and don’t hesitate to contact the IN TEAM for professional advice when needed. After all, peace of mind is priceless! 😊
For more tips on managing your small business finances, download our Ultimate Guide to Freelancing or sign up for our weekly email full of top tips for a successful career in freelancing, consulting, contracting or coaching.
Remember, the information provided in this article is based on the current UK tax legislation for the 2024-25 tax year and may be subject to change. Always consult a professional for the most accurate advice.
