What is IR35 and do I need to worry about it?

IR35 affects freelancers and Contractors in the UK. It was introduced by the government to reduce tax avoidance but what actually is it?

What is IR35?

IR35 is a set of tax laws introduced in 2000 by HMRC to crack down on 'disguised employees.' These are people who work for a company on a freelance or contract basis but are essentially operating as full-time employees. This is called Disguised Renumeration.

The aim of IR35 is to ensure that people who are working like employees pay the same amount of tax and National Insurance contributions as permanent employees. This is because employees pay Income Tax and National Insurance contributions on their earnings through the PAYE system, while self-employed people pay a lower rate of tax and National Insurance contributions through a Self Assessment.

Individuals working outside IR35 are operating legitimately as Contractor and are not liable to pay tax through the PAYE system operated by the contracted employer. Individuals who are found to fall inside IR35 are expected to pay the same amount of Income Tax and National Insurance contributions that an Employee would pay.

What powers does IR35 give HMRC?

IR35 gives HMRC the power to investigate whether a freelancer or Contractor is actually a disguised employee.

If they determine that someone is a disguised employee, they can demand that the company they work for deduct income tax and National Insurance contributions from their pay, just like they would for a regular employee.

They can also issue a Loan Charge. This is a tax penalty for individuals involved in Disguised Renumeration. The tax obligations fall on the employer but if the employer no longer exists, the tax can be force upon the Employee.

Am I a genuine freelancer or contractor?

HMRC use lots of different factors to decide whether or not you count as a genuine freelancer or contractor. Here are the three most important:

1. Control and direction - The client has no control over how the contractor completes the job. This includes things like work hours, if they will be under supervision from managers etc.
2. Substitution - The contractor can send a substitute to complete the work for them. However, some contracts allow clients to refuse substitute workers that do not have the correct qualifications to complete the job to the correct standard.
3. Mutuality of obligations - There must be a lack of obligations for future work when the initial task is completed. The obligations must not apply when the contract has ended but can obviously apply when the work is not finished.

If you're still unsure, you can try HMRC's employment checker on their website to see if you're a genuine contractor.

Should I be worried about IR35?

If you're a genuine freelancer or Contractor, you shouldn't have anything to worry about. IR35 only applies to people who are working as disguised employees. If you're genuinely Self-employed, you'll continue to pay tax and National Insurance contributions at the lower rate.

However, if you're working on a contract that HMRC might consider to be 'inside IR35,' it's important to make sure you're paying the right amount of tax and National Insurance contributions

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