What's all the fuss about IR35?
IR35 has been causing headaches for contractors across the UK for years. If you work through your own limited company, these rules could seriously affect how much tax you pay.
Many contractors have found themselves facing unexpected tax bills because they didn't understand these rules. That's why it's worth taking a few minutes to get your head around IR35.
Let's break it down in plain English so you can understand what it means for your work and finances.
How does HMRC decide if you're inside or outside IR35?
HMRC looks at how you actually work, not just what your contract says. They focus on several key factors:
Do you have to do the work yourself, or can you send someone else? If you can't send a substitute, it points to employment.
Does your client control when, where, and how you work? More control suggests employment.
Must your client offer you work, and must you accept it? This "mutuality of obligation" is typical of employment.
Do you use your own equipment? Employees typically use their company's tools and equipment.
Could you lose money if things go wrong? True contractors take financial risks that employees don't.
Who decides your IR35 status now?
The rules changed in April 2021 for most private sector contracts. Before that, contractors determined their own status, but now, if your client is a medium or large business, they decide whether your contract falls inside or outside IR35.
Small private businesses are exempt from this change, so if your client is small, you still determine your own status. Public sector clients have been responsible for determining IR35 status since 2017.
Your client must give you a "Status Determination Statement" explaining their decision, and you have the right to challenge it if you disagree.
What happens if you're caught inside IR35?
If your contract is deemed inside IR35, you'll pay a lot more tax. Income tax and National Insurance will be deducted from your fees before you get paid, and you'll lose the tax benefits of taking money from your company as dividends.
You won't be able to claim as many business expenses as genuine contractors can. This can increase your tax bill by up to 25%.
The worst part? You'll pay taxes like an employee but won't get any employee benefits like holiday pay, sick pay, or pension contributions.
How can you protect yourself from IR35 problems?
Make sure your contracts accurately reflect how you actually work. Having a great contract won't help if your day-to-day reality looks like employment.
Keep records of your work and decisions to show you're independence. Save emails, project plans, and other evidence that demonstrates your contractor status.
Consider getting professional IR35 status reviews before signing new contracts. This can highlight risks before you start and potentially save you thousands in tax later.
Think about IR35 insurance to cover the cost of tax investigations and potential tax bills if HMRC challenges your status. For contracts that are definitely inside IR35, many contractors use umbrella companies instead of their limited companies.
What recent changes to IR35 should you know about?
The biggest change happened in April 2021, when responsibility for determining IR35 status in the private sector shifted from contractors to clients. HMRC promised a "soft landing period" for the first year, focusing on helping people comply rather than punishing honest mistakes.
There's now a formal process for disagreeing with status determinations. Clients must respond to challenges within 45 days, giving contractors more rights in the process.
HMRC updated their CEST (Check Employment Status for Tax) tool, but many tax experts still don't trust its results. Several high-profile court cases have shown how complex IR35 decisions can be, with HMRC losing as many cases as they win.
How to stay on the right side of IR35
IR35 isn't going away, so it's worth getting to grips with these rules if you're a contractor. Getting IR35 wrong can lead to big tax bills, penalties, and stressful HMRC investigations that can look back several years.
The good news is that with the right advice and planning, you can work in a way that keeps you outside IR35 for genuine contract work. Regular reviews of your contracts and working practices will help you stay compliant as rules and interpretations change.
I once worked with a contractor who faced a £30,000 tax bill because they hadn't updated their working practices after the 2021 changes. Don't make the same mistake – stay informed and proactive.
Final Thoughts
Pie is the UK's first personal tax app designed specifically for working individuals like contractors. Unlike other solutions, Pie offers integrated bookkeeping, real-time tax figures, and simplified tax returns, helping you stay on top of your IR35 obligations.
Remember, what matters most is the reality of your working relationship, not just what's written in your contract. Stay informed, get proper advice, and you'll be able to navigate IR35 with confidence.
