A Guide to IR35 for IT Contractors

IR35 has had a massive impact on contractors and how they work. That’s no exception for IT contractors, who make up a large proportion of the self-employed market. In this post, we’ll take a closer look at the ins and outs of IR35 for IT contractors and the effects it’s had upon them.

What is IR35 for IT contractors?

First introduced in 2000, IR35 is a series of subsequent ax laws (rolled out over a number of years) that were enacted through the annual Financial Acts. The UK government uses IR35 as a way to make sure that IT contractors and others pay the correct income tax and national insurance tax. In essence IR35 is a tool which allows HMRC to treat you for tax purposes as an employee of your end client rather than a sole-trader or the owner of a limited company.

While HMRC can’t class every IT contractor as an employee of their end client. IR35 allows them to look for two main indicators when deciding how a contractor should be treated tax wise.

The first is very clear cut; since 2017 any IT contractor working for a public sector end client has generally been considered inside IR35 (although this isn’t the case 100% of the time).

The second is less clear; do you act as an IT contractor or an employee?

Employees wouldn’t have the freedom to choose how, when or where they worked – the same as employees. They might not be able to turn down work given to them, in the same way that an employee cannot refuse to do work. If you removed the intermediary (their limited company) from the process, they would be an employee in all but name (referred to as a disguised employee).

Working through a limited company, these ‘disguised employees’ would be entitled to lower taxation through dividends and corporation tax, and thus short change HMRC of tax revenue.

On the other hand, legitimate self-employed workers can choose their working style, accept or refuse work, pick their own workplace or outfit and only have to work on a project-to-project basis.

While the number of IT contractors acting as disguised employees was actually very small, by the fact of being a contractor they were swept up in IR35. Over time as IT contractors adapted their working practices and contracts to abide by the rules, IR35 has been repeatedly adapted.

Controversially what started as a set of rules to catch small time low paid workers turning to contracting to save tax turned into a full scale assault on legitimate contractors and their tax affairs (as HMRC realized the tax revenues it could generate as a result of targeting high earning workers like IT contractors).

The rules of IR35 will be changing again in April 2020 to automatically catch all private sector IT contractors.

How did IR35 affect the public sector?

One of the most controversial changes to the rules of IR35 happened in 2017. In April that year, new ‘off-payroll’ rules came into effect. Before these rules it was down to the contractor to prove that they were genuinely self-employed. This is called being ‘outside IR35,’ and means that you are correctly paying the lower taxes reserved for entrepreneurial workers. The alternative is referred to as being ‘inside IR35,’ which is the same as being a disguised employee.

As of 2017 it was no longer a public sector IT contractors responsibility to decide if they were caught by IR35. The public sector end client that you worked for had to prove to HMRC that you were a legitimate contractor with financial penalties if they got it wrong. Naturally under the threat of financial losses most departments simply blanket classed their contractors as inside IR35.

A knock-on effect

The 2017 rules meant that public sector companies and contractors could no longer use these tactics to save on tax. Contractors who were caught out by HMRC could face fines and have to pay back the tax owed and interest. Companies could also be asked to pay back the money that should have been taken at source. Both parties could also face fines for late payments.

These changes to IR35 only applied to contractors working in the public sector. As a result, some public sector companies stopped using contractors inside IR35. The companies did not want the responsibility of proving that the contractors were legitimate. This meant that some contractors lost out on work, and the new rules were heavily criticized.

As many public sector companies refused to use contractors for projects like crucial IT projects, workers were forced to look to the private sector with many government sponsored projects getting a lower quality of project as a result.

How is IR35 changing?

In April 2020, the rules of IR35 are planned to change again despite facing more criticism. These new amendments mean that the change in responsibility of proof will now apply to companies in the private sector as well.

Contractors who thought that working in the private sector would be the solution will have to deal with this issue next year. Like public sector companies, those in the private sector will have to make sure that their workers are legitimate, so they are not fined.

It is widely expected that private sector companies will follow their public sector counter parts and either stop using contractors or declare them inside of IR35.

How could it affect IT contractors?

When IT contractors were turned away by public sector companies in 2017, many found work in the private sector. They lost out on public sector opportunities like working for the NHS and MOD, who no longer wanted the risk of using contractors. Projects like the HS2 also turned them down. Despite private sector companies still being an option, this also had its problems.

The uncertainty of Brexit meant that millions of companies have put billions of pounds of technology and IT projects on hold. As we do not know what the effects of Brexit will be on the UK, there is uncertainty about the future of these projects. This lack of insight means that there may be less opportunities for IT contractors.

However, there is some good news. Many private sector businesses still have an urgent need for IT contractors. There are still many projects that must go ahead. Being skilled in areas of IT such as programming or software engineering is highly sought after. The contractors that do work in the private sector can charge high rates for their services, knowing that their knowledge is valuable.

How to sidestep IR35

Despite IR35 and its many changes causing confusion for contractors and companies, there is an easy solution. Working for an umbrella company means that contractors do not have to worry about IR35. In the eyes of the umbrella company and HMRC, they are employees anyway. Umbrella companies calculate and deduct the correct taxes at source. So, there’s no need to deal with IR35 and it’s implication on a Limited Company.

At Umbrella Supermarket, we make it easy to find the perfect umbrella company for you. Alongside our invaluable resources, you can compare umbrella companies to find the best deal from leading providers and take the hassle out of self-employment.

Would you like more information on A Guide to IR35 for IT Contractors?

Explore More Resources

using an umbrella company

Beginner’s Guide to Using an Umbrella Company

If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.

After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.

 

PAYE and Umbrella

Guide to PAYE vs. Umbrella

PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.

To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.

Holiday Pay for Umbrella Contractors

Complete Guide to Holiday Pay for Umbrella Contractors

One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.

To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.

umbrella company

When Shouldn’t You Use an Umbrella Company?

Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.

One way that contractors can work is through an umbrella company.

Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?

To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.

umbrellas

The truth about HMRC approved Umbrella Companies

There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.

After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.

However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.

To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.

umbrella company costs

How Much are Umbrella Company Costs?

If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.

To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.

 

Choose Between PAYE or Umbrella

How to Choose Between PAYE or Umbrella

Every contractor faces the decision between PAYE or umbrella, but how do you know which is the best option for you?

After all, PAYE and umbrella both have key differences, meaning contractors should do their research to find the best path for them.

Thankfully, Umbrella Supermarket is here to help. In this guide, we take a look at PAYE vs. umbrella, explaining what you should know before making the all-important decision.

date rates vs hourly rates

Should contractors choose hourly or daily rates?

There are many decisions a contractor must make in their career. One important one is whether to charge daily rates or hourly rates.

Each option has its own pros and cons and will have a different impact on contractors.

Therefore, it’s important that every contractor does their research to find out which option is best for them.

In this guide, Umbrella Supermarket looks at hourly rate vs daily rate and the benefits and drawbacks of each, to help every contractor find the best route forward for them.

 

public sector private sector contractors

How to choose between public sector vs. private sector for contractors

Every contractor must make the decision about whether to work in the public sector vs private sector.

Operating in the public or private sector can have a big impact on the contractor’s career, including on what types of contracts they will work on, who they will work with to whether they will fall under IR35.

This is especially true since changes to IR35 legislation were rolled out in April this year which have had a significant impact on private sector contractors.

If you are debating between contracting in the public sector vs private sector, Umbrella Supermarket are here to help. In this guide, we outline the key differences between the public and private sectors and what effects this will have on contractors.

contractor options

Complete Guide to Contractor Options

Contracting has become an increasingly popular way of working in recent years. If you have decided that the time is right to begin your contracting career, one of the first questions you will ask yourself is how you will operate.

How they operate is one of the main decisions contractors must take which will have a big impact on your day-to-day contracting life.

After all, there are a number of ways you can work, including through an umbrella company or by being self-employed.

In this guide we look at umbrella company contracting vs self-employed contracting and the main advantages and disadvantages of each, to help you make the right decision.

 

Statutory payments

Statutory payments for contractors explained

Contractors can choose to work on a self-employed basis through their own limited company, or through an umbrella company as an employee of the provider.

Thousands of contractors choose the umbrella route. After all, there is a range of benefits to operating under an umbrella company, including receiving statutory rights.

If you are considering becoming an umbrella contractor in 2021 and want to know more about statutory payments for umbrella contractors, Umbrella Supermarket has put together this handy guide outlining everything there is to know.

comparing umbrella companies

What To Look Out For When Comparing Umbrella Companies

Working through an umbrella company has become an increasingly popular option for contractors in the UK.

An umbrella company makes contracting easy and hassle-free for contractors, saving them headaches on everything from tax, payroll, insurance to dreaded IR35.

However, with are so many umbrella companies out there, choosing the perfect one for you is no easy task.

To help, Umbrella Supermarket have put together this handy on what to consider when comparing umbrella companies, so you can find the best one in 2021.