We've put together a simple guide on how IR35 affects you as a contractor.
The purpose of the "Off-payroll working" or IR35 rules is to prevent contractors from operating as 'disguised employees' and subject them to similar taxation as employees. These regulations apply to all contractors who do not meet HMRC's criteria of self-employment.
So what is HMRC’s definition of self-employed?
The gov.uk website states that individuals can be considered self-employed if "most of the following statements are true":
- they put in bids or give quotes to get work
- they’re not under direct supervision when working
- they submit invoices for the work they’ve done
- they’re responsible for paying their own National Insurance and tax
- they do not get holiday or sick pay when they’re not working
- they operate under a contract (sometimes known as a ‘contract for services’ or ‘consultancy agreement’) that uses terms like ‘self-employed’, ‘consultant’ or an ‘independent contractor’
If your assignment falls inside IR35, you're treated as a disguised employee and will pay PAYE Income Tax like any other employee. If it's outside IR35, you're considered self-employed and can be paid through a limited company with tax advantages.
HMRC employs various tests to ascertain whether you fall within or outside the purview of IR35. These tests can be summarised as follows:
Mutuality of Obligation (MOO)
Essentially, the client has a responsibility to provide the work, while the contractor is obligated to complete it. This arrangement can be seen as a contract of employment. If your contract restricts you from taking on other clients while working for your current client, it may indicate that you fall within IR35.
Substitution
Can you delegate the work to someone else, as and when required? This is not feasible for an employee, but the ability to substitute someone else should be possible for a contractor who is truly running their own business.
Control
If your employer has control over your workload and the way in which it is carried out, it indicates that you are within IR35 and are not considered to be offering a personalised service like a freelancer would.
So what are the differences between being classified as Inside or Outside IR35?
Lets take a look below:
| INSIDE IR35 | OUTSIDE IR35 |
| Client controls how when and where the services are delivered. | Contractor controls how when and where the services will be delivered. |
| Contractor is viewed the same as other employees of the client. | Contractor is viewed as an external resource and not an employee |
| Contractor is paid regardless if the quality of the services provided. | Contractor will have to cover the cost of insurance and may be working to payment on deliverables. |
| Client is obliged to offer additional work and the contractor is obliged to accept. | Contractor has no obligation to accept work other than that is already agreed. |
| Client would not be willing to accept a substitute to provide services. |
Contractor could pay and provide a substitute. |
| Contractor is not providing their own equipment. | Contractor will use own equipment to provide services agreed. |
If you work through an umbrella company, IR35 doesn't apply to you. You are considered an employee of the company, and your income is already taxed as employment income, so you don't need to worry about IR35 when working in this way.
If you still have questions or wish to discuss any of the above you can in touch with our onboarding team using the contact details below:
📞01179 297 683
📧 sales@nasagroup.co.uk