The IR35 is the tax legislation that aims to find people who are not paying their taxes. The IR35 legislation targets those individuals who provide their services to clients through their own company, also known as a personal service company. This means that HMRC does not consider the contractor in question to be self-employed from a taxation perspective, hence they should be taxed in the same manner that a permanent employee would be, thereby falling under what is known as IR35. HMRC identifies these tax evaders using two categories; inside and outside IR35.
IR35 was part of HMRC’s efforts to prevent businesses and contractors from acting as employers and employees to avoid paying certain taxes. Employers could save money by avoiding National Insurance Contributions and evading any legal responsibility to respect employee rights or provide benefits. In exchange, employees posing as contractors would pay less income tax.
Inside and outside IR35
When explaining IR35, we often refer to inside and outside IR35. Being inside IR35 means that your contract is subject to off-payroll working laws, and HMRC regards you as an employee for tax purposes. Being outside of IR35 indicates that your contract points to self-employment, allowing you to operate tax efficiently.
Inside IR35 you:
- Do all of the work that your business has been hired to do.
- Work for your own limited company and enjoy employment benefits such as paid time off or sick leave.
- Get paid on a time basis.
- Are closely monitored by someone from your client’s business.
- Are provided with the equipment by a customer and you operate at their location.
- Have a long-term relationship with one client.
- Redo all rejected work at the expense of your client.
- Do not have your own business identity.
Outside IR35 you:
- Have the power to delegate or replace work contracted to another individual, and you execute that power in practice.
- Work for your own limited company and do not receive any benefits such as paid time off or sick leave.
- Being paid project-by-project or on a fixed-price basis.
- Have the right to choose how and when you work, and you can send a substitute if you want.
- Provide the necessary equipment and can operate from your location.
- Work with many clients at once or on short-term projects with a range of clients.
- Redo all rejected work at your expense.
- Have your own business address, insurance, and branding.