What does ‘inside IR35’ mean for contractors?

What does ‘inside IR35’ mean for contractors?

01/27/2021 - 08:24

With changes to off-payroll working rules imminent, experts predict a tidal wave of new ‘inside IR35’ judgements in the next few months. 

If you are a contractor working through your own limited company then you are at risk of being judged ‘inside IR35’ - but what does this mean for you and your bank account?

With changes to off-payroll working rules imminent, experts predict a tidal wave of new ‘inside IR35’ judgements in the next few months. 

If you are a contractor working through your own limited company then you are at risk of being judged ‘inside IR35’ - but what does this mean for you and your bank account?

What does inside IR35 mean?

If a contract is advertised as ‘inside IR35’, it means that HMRC will treat you like an employee for tax purposes.

Off-payroll working rules (IR35) were first introduced in 2000 in an attempt to stop ‘disguised employees’ from using a limited company working arrangement to pay less tax.

If your work is ‘outside IR35’ then, in HMRC’s eyes, you are genuinely self-employed, providing your services on a business to business basis. If you are ‘inside IR35’, however, then HMRC treats you like an employee, meaning you’ll effectively pay higher rates of income tax and National Insurance.

Remember, even though HMRC treats you like an employee, your ‘employer’ doesn’t need to give you any job security or benefits. Inside IR35 is the worst of both worlds for contractors.

Who decides if I’m inside IR35?

Until recently, all IR35 determinations were made by contractors themselves. Although there was some HMRC oversight in the form of IR35 investigations, there was a strong incentive for contractors to class themselves as ‘outside IR35’.

In an attempt to improve IR35 enforcement, HMRC changed the way that rules were applied in the public sector in 2017, meaning that public sector engagers were responsible for making IR35 determinations.

Similar rules will be introduced for private sector engagements this year, but small businesses will be exempt from the changes.

How will an inside IR35 determination affect me?

Being ‘inside IR35’ has implications for the amount of tax you pay. If you are ‘inside IR35’ you are classed as an employee for tax purposes. You will also need to pay income tax and National Insurance Contributions.

Your engager will work out how much income tax and National Insurance you need to pay on your behalf and deduct this from your take home pay.

Is it worth taking an inside IR35 contract?

For contractors that take on a combination of inside IR35 and outside IR35 contracts, it may be worth keeping your limited company. However, this is only likely to apply to a small number of contractors.

For most contractors, the vast majority of their future engagements will be either inside IR35 or outside IR35.

Our Licensed Insolvency Practitioners at Umbrella.UK Insolvency can offer professional advice to IR35 contractors today. Depending upon how much cash there is left, using a Members’ Voluntary Liquidation (MVL) could be the most tax-efficient way and save you thousands of pounds. Get in touch today.

For more information about how an umbrella company can save you time and money if you’re trapped inside IR35, speak to a member of the team today. Call: 0800 121 6513.