Inside or Outside of IR35?
Everything you need to know about being inside or outside of IR35…
What Does It Mean?
As the current rules state, private sector businesses engaging with contract workers, whether via a limited company or sole trader, will be responsible for determining workers’ statuses. However, if the end-client is based outside the UK, the new Off-Payroll rules do not apply but the original Onshore Intermediary legislation must still be applied. In that case, the worker and intermediary company must determine status.
But what exactly does it mean to be inside or outside of IR35 and how do businesses correctly determine a worker’s employment status?
What does it mean to be inside IR35?
To be operating “inside IR35” means that, under the IR35 legislation, the worker is deemed an employee and therefore must pay the same tax as a permanent member of staff. As well as employee’s National Insurance, employer’s NI would also apply.
So how do you know if a worker is operating inside of IR35?
• They work for a business (intermediary or end-client) on a long-term basis, commonly with exclusivity to that business
• The company supplys the worker with equipment/tools to carry out the job
• The worker is receiving employment benefits such as paid leave or sick pay
• The worker is being paid by the hour or day, instead of price work
• They are being supervised, directed and/or controlled by somebody on the client site
If a contract worker falls inside IR35 and is not already being paid under PAYE, the supervising client will need to take action. Each worker must be qualified using the government CEST tool or via a similar digital questionnaire to determine status. Alternatively, the company may decide to hire the worker directly or through an Umbrella company like Futurelink, who will deduct all necessary taxes and provide benefits such as pension, holiday and sick pay.
Check out our Umbrella PAYE section for more information.
What does it mean to be outside IR35?
To operate ‘outside IR35’ means that the legislation allows workers to contract through a limited company or as a sole trader. This means that the worker can pay themselves a small salary and withdraw further income as dividends (which are not subject to NIC), whilst their limited company pays tax only on its profits.
To determine if a worker is self-employed and falls outside of IR35, they will have to meet the following criteria…
• The worker has the right to delegate or substitute work to others
• They do not receive employment benefits such as paid leave or sick pay
• The worker is being paid on a project basis or at a fixed price
• They have their own equipment to use for the job
• The worker has multiple projects with a variety of clients
• They have their own premises, insurance, and branding
Naturally, the majority of contract workers will steer clear of contracts that fall ‘inside’ of IR35 as it will affect their net pay. If the worker falls ‘outside’, they can continue self-employment, taking advantage of the tax relief offered such as applying tax deductible expenses (travel and subsistence) as well as avoiding the impact of employer’s National Insurance costs.
If you need any help or assistance with our payment solutions for self- employed workers, please enquire now.