Am I Inside or Outside IR35?

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In the past, it hasn't just been new contractors who have been caught out, even experienced workers can get tangled up in the requirements of the legislation. It's therefore imperative to understand the basics to make life as a contractor easy as possible

It is first necessary to understand exactly what IR35 is before looking at how it can affect contractors as well as the pros and cons of being inside and outside. Read on as we explore the full picture.

What is IR35?

To put it simply, IR35 is a piece of government legislation which determines whether a contractor should be classed as in full-time employment rather than self-employed when it comes to paying tax.

This legislation was introduced in April 2000 to eliminate what the government saw as 'disguised employees'. These 'disguised employees' were seen to be attempting to take advantage of the tax efficiency they receive while working through a limited company, despite doing the job of a full-time employee.

So, to tackle the issue, the government implemented the legislation to clarify whether a person should be deemed employed in the eyes of Her Majesty's Revenue and Customs.

The differences between contracted work and employment can often be a confusing and unclear area, so there are specific terms and requirements that the government has issued as part of IR35 to make the situation easier to understand.

Inside or outside IR35

Knowing exactly where you stand with regards to the legislation can be confusing, but it is imperative to understand.

Recognising the phases 'Inside IR35' and 'Outside IR35' is crucial to defining an individual's status and will have a significant impact on contractual work that is undertaken in the future.

Inside IR35

If someone's role is classed as full-time employment for an end client, HMRC will refer to this individual as being 'inside IR35'.

This ultimately means you must stick to the same government guidelines that any normal employee would. A person must ensure they pay the appropriate taxes for standard Income Tax and National Insurance on all earnings through what is classed as a 'deemed payment' at the end of the tax year.

Working out your deemed payment can be complicated, so it's best to speak to your accountant to make sure you get it right. Otherwise, you could face heavy investigation from HMRC.

Should an individual be found to be 'inside IR35' following the investigation, HMRC will order them to all Income Tax, NICs and interest they may have accrued, as well potentially a penalty which should have been paid during the accounting period in question.

Given HMRC can investigate as far back as six years, being found non-compliant can have huge financial consequences so diligence is highly recommended in this situation.

Outside IR35

When a person is outside IR35, HMRC will deem you as a genuine business. This will mean you will be working outside of IR35 rules.

In this situation, you will be able to pay yourself a salary, draw the remainder of income as dividends, and remain responsible for your taxes as usual.

Determining your position

There are key differences in a person's daily working routine that will clearly outline why they are working inside or outside IR35.

For example, if a person is working outside of the legislation, they would be the one to decide when and where they work rather than the client. This is not something you would often see in full time employment.

Additional points include having no obligation for ongoing work, how the worker is paid and whether they have access to corporate benefits.

If you are still unsure where you sit, there are tests you can take online which will assess your current work practices and let you know if you are 'inside' or 'outside' IR35.

HMRC recommends using their CEST tool which will take you through different requirements. In the past, HMRC has said that it will stand by the results of CEST, however, it's still worth being wary as they can still open up an investigation.

Who decides if IR35 is applied?

If a contractor is working within the public sector, then it is up to the client to determine whether or not IR35 applies. In this scenario, the client must deduct income tax and National Insurance as they would do for employees.

However, if the contract is within the private sector, an intermediary is required to make an extra payment to compensate for the additional tax and NI that HMRC would have received on an equivalent employee's wages.

It is crucial to note that soon, this will soon not be the case. From April 2020, the IR35 rules will be altered to be more in line with the public sector. It will be up to the medium to large-sized clients to determine whether their contractors fall inside or outside IR35 and work out the contractor's deductions.

Circumnavigating IR35 with an umbrella company

It can be a headache try to understanding whether you are working inside or outside IR35. It is therefore understandable that, as a contractor, you will want to circumnavigate IR35 altogether to ensure you do not come under investigation.

The best way to do this would be to work with an umbrella company as all the income that you earn will be deemed 'employment income'. Contractors using umbrella companies will also receive additional benefits, including statutory benefits like holiday pay and sick pay that are usually only offered with full-time employment.

Comparing umbrella companies

If you do choose to go down the route of an umbrella company, it should go without saying the importance of researching the company's history and looking at their fee structure. Also, be sure to take note of their payment frequency and any other possible benefits such as insurance they may be able to offer you.

The best way to compare companies is by using our clear umbrella company comparison site. It provides a fantastic way to gauge each company's financial benefits and additional perks and determine which one will be the best deal for you.

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