The acronym alone – IR35 – sounds boring and confusing, let’s be honest. And those who have had to look into it will know that it’s far from easy to understand which is concerning considering just how many self-employed people it’s set to impact.
Essentially, IR35 is the name given to the off-payroll working rules set by HMRC. It was designed originally to prevent the perceived tax avoidance involved when an employee switches to contracting.
While IR35 is apt to cause panic for many people at just its mention, there are a few basic recommendations that you can follow to stay relatively safe from an investigation.
Inside or Outside?
If the contract is ‘inside IR35’, it points towards employment. HMRC sees your freelancer as an employee and the freelancer faces an income tax and National Insurance burden, just as employees do.
If the contract is ‘outside IR35’, it points towards self-employment, and the freelancer can enjoy the tax efficiency that self-employment brings (as well as all the associated risks).
How do I know if the contract counts as inside IR35?
HMRC also has a tool called CEST (check employment status for tax) you can use to check whether IR35 applies to a contract, plus an IR35 helpline.
What constitutes an IR35 contract?
In general, IR35 won’t apply if the contract is for services rather than employment. The top three things relevant to whether or not the contract is inside or outside IR35 would be;
Supervision, direction, control – this relates to how much say the client has over how the freelancer works.
Substitution – is the freelance service replaceable? I.E can it be carried out by someone else? If not, you’re likely to be within IR35.