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IR35: What You Need to Know as a Contractor

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What is IR35?

IR35, also known as the ‘off-payroll working rules’, is a tax law that aims to prevent contractors benefitting from ‘disguised employment’. A disguised employee is an individual who works ‘like an employee’ but operates through their own Limited Company in order to gain an unfair tax advantage. IR35 is a piece of legislation that assesses whether contractors in both the public and private sectors are genuinely independent or should instead be classified – and taxed – similarly to regular employees.

The IR35 landscape has undergone significant transformations, with substantial reforms in both the public sector (April2017) and private sector (April 2021). These changes shifted the responsibility of determining IR35 status from the contractor to the client in these sectors. Despite discussions and announcements in the political arena and beyond, these reforms remain in place today.

The implications of these IR35 reforms have significantly shaped the contracting landscape. As specialists in the legislation – and its impact on contractors like you – we’re committed to offering you up-to-date, comprehensive guidance to ensure you stay informed and compliant.

Inside or Outside IR35

Your contract’s IR35 status will determine your tax obligations. Being considered ‘inside’ IR35 means your contract is deemed as employment, and you are liable for Income Tax and National Insurance Contributions (NICs). Conversely, being ‘outside’ IR35 implies that you’re recognised as a genuinely independent limited company and should therefore be taxed accordingly.

It’s important to note that being inside or outside IR35 depends on the specifics of your working arrangement rather than just what is written in your contract. HMRC will assess the nature of your working relationship to determine your IR35 status.

Let’s take a look at some of the factors they consider…

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Inside

  • Supervision, Direction, and Control: Your end client has significant control over how, when, and where your work is completed.
  • Mutuality of Obligation: Your end client is obliged to provide work, and you are obliged to accept it.
  • Personal Service: You must personally carry out the work and cannot send a substitute.
  • Part of the Team: You are essentially ‘integrated’ into the client’s organisation, attending company meetings and using company equipment.
  • Financial Risk: You bear little to no financial risk from the arrangement, being treated similarly to an employee in terms of payment structure.
  • Employee Benefits: You receive benefits similar to those of an employee, such as paid leave or pension enrolment.
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Outside

  • Right of Substitution: You can send someone else to do the work in your place.
  • Control: You have autonomy over how, where and even when your work is completed, without direct supervision or control by your client.
  • No Mutuality of Obligation: Once a project is completed, there is no obligation on your client to offer more work, nor are you obliged to accept it.
  • Financial Risk: You bear greater financial risk, for example, correcting unsatisfactory work at your own cost.
  • Business on Own Account: You operate as a ‘legitimate’ business, potentially having your own branding, website and, crucially, other clients.
  • Provision of Equipment: You often use your own equipment to complete the assignment.
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What is IR35 & how does it work?

Umbrella Companies & IR35

It’s essential to understand your contract’s status and its implications on your financial standing. Being inside IR35 can lead to higher tax liabilities and reduced net income. This is where umbrella companies come in.

By joining an umbrella company like Danbro Umbrella, you’ll become an employee. This setup naturally places you outside the scope of IR35, as we’ll handle your tax and NICs through PAYE.

We offer a straightforward solution to the IR35 conundrum, allowing you to focus on your work without handling the complexities of tax legislation or the fear of falling foul of IR35.

So, get in touch today, and see what Danbro Umbrella can do for you.

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