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IR35 Explained

IR35 legislation is designed to tax self-employed contractors who work as if they were employees. In principle, it's a way to prevent employers from 'disguising' employees as contractors, and so avoiding employment rights, benefits, and employer contributions to things like workplace pensions and National Insurance.


In practice, the IR35 rules are complicated and can be very costly for contractors who are deemed by HMRC to be working inside IR35. Even if you are confident that all of your work falls outside IR35, it's essential to be aware of the legislation so you can keep the necessary documents to prove your status.


Primis offers a number of IR35 umbrella and PAYE solutions that can help reduce the total IR35 tax you pay. Once we have IR35 explained, we'll take a look at those options in more detail.


What is IR35?

The HMRC IR35 rules were first introduced in April 2000 and, with a few changes, IR35 legislation has been in place ever since. The measures were announced by the then Inland Revenue in a press release numbered 35 - hence Inland Revenue 35, or IR35.

Under the rules of IR35, self-employed individuals must not work under the same conditions as employees of the client company. Proving that your work falls outside IR35 can take several forms, for example:

  • Ability to work when and where you choose

  • Ability to work for other clients at the same time

  • Ability to take time off without requesting it

  • Being required to leave when employees stay

  •  Having your own website to promote your business

The list goes on, but in general any documented evidence that you are independent of the client, and not working as an employee, can help to prove that your work does not fall inside IR35.


Who does IR35 apply to?
 

Now we have the basics of IR35 explained, how do you decide whether the rules apply to you?

In the past, much of the power was with the contractor, who usually just had to tell clients that they were not liable to pay IR35 tax in order for a contract to go ahead.

This changed in April 2021. Under the new rules from HMRC, IR35 status is now determined by the client, if the client is a public authority or a medium to large sector client. These are the "off-payroll working rules" and applied to public authorities from 2017, with medium-large private firms joining the new rules in the midst of the COVID-19 pandemic.

As a result, under the changes to IR35 self-employed people have less control than ever over their own tax status, and there has been a surge in contractors working under umbrella companies as a way to take back that power and regain some confidence over their likely tax bills.


Working within IR35
 

So, what do you need to know if you work inside IR35 rules?

Ultimately it all comes down to the amount of tax you have to pay, but for contractors that also means knowing how much you can claim in expenses.

How much tax will you pay?

Because working inside IR35 is considered equivalent to employment for tax purposes, you will pay several forms of standard employment taxes. Your 'employer' will also be required to make the usual contributions.

As a result, this means that between you, you must pay:

  • Employer National Insurance Contributions (NICs)

  • Employee NICs on the deemed payment

  • Income Tax on the deemed payment

There may also be other deductions, such as pension contributions, if you participate in a pension scheme. The IR35 rules are complicated unless you have a background in finance or accounting, which is why many contractors prefer to work with a payroll solution like Primis.

Can you claim expenses inside IR35?

The right to claim IR35 expenses was significantly cut back under the changes made in 2021, yet the page 'How to calculate the deemed employment payment' page on GOV.UK has not been updated since 2019, and is now misleading.

Prior to 2021, the deemed employment calculation started with deducting a 5% "general expenses" allowance, but since April 2021 the 5% allowance:

  • Does not apply to public sector contracts

  • Does not apply to medium-large private clients

  • Can still be claimed if the client is a 'small company' for tax purposes

You can deduct expenses that would have been paid to you if you were a direct employee. However, if the off-payroll working rules apply, you are not allowed to claim expenses for travel and subsistence.

An alternative to claiming expenses is to include a general disbursement in the invoice to the client, although this might mean that you need to increase the price you quote for the job upfront.

Do I still need to self-assess?

Yes. The government tells employers: "The deemed employment payment is treated as your worker's employment income from you or a partnership. Your worker should include it with any other employment income on their self-assessment tax return."

This increases the admin burden even further for self-employed contractors, who not only need to negotiate the IR35 legislation when taking on a new contract but must also declare the income in the usual way at the end of the tax year.

Primis

If any of the above sounds confusing, it is. The IR35 rules are incredibly complex and an ongoing source of dispute between the government, HMRC, contractors and workers' associations.

Primis can cut through a lot of this complexity. You get a single contract of employment through our payroll solutions, confidence about your level of take-home pay, and can work as an employee with us acting as an intermediary.

Primis offers several ways to do this:

  • Umbrella gives you an employment contract with benefits, for contractors inside IR35

  • PAYE is a standard Pay As You Earn option if you fall within IR35 rules

  • Ltd Company allows you to work via a Personal Services Company (PSC) in line with your IR35 status

You can find out more about all of our payroll solutions in our Contractor Hub, or by downloading our Key Information Documents (KIDs).

If you have any questions or you'd like a personalised quote for your take-home pay under any of our umbrella solutions, please contact us directly and we'll be happy to arrange an initial consultation.

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