IR35

Inland Revenue 35, also known as IR35 or the “Intermediaries Legislation”, is a set of off-payroll working rules for intermediaries, contractors and companies in the UK. IR35 is a UK tax legislation designed to identify contractors who avoid paying the appropriate tax by providing their services through an intermediary and working as ‘disguised employees’. IR35 also aimed to identify businesses engaging workers on a self-employed basis to ‘disguise’ their actual employment status.

Contractors working via an intermediary such as a Personal Service Company (PSC) can take advantage of a range of tax reliefs to offset their tax bill. They can also earn income through a combination of salary and dividends, allowing contractors to pay lower rates of Income Tax and National Insurance compared to regular employees. Therefore, becoming a director of a PSC (also referred to as a limited company) is a much more tax-efficient way to operate as a contractor compared to contracting via an umbrella company or employee of a company.

However, HMRC deemed that too many individuals were taking advantage of this tax loophole and avoiding paying the correct amount of tax and NICs. Therefore, HMRC brought in IR35 as they believed that many of these individuals would have been employees if not for the PSC arrangement and, thus, should be paying the same income tax and NICs as employees. IR35 aimed to level the playing field and remove this unfair tax advantage.

As part of the off-payroll reforms introduced in 2021, the end client must conduct a thorough IR35 assessment of every contractor they engage and declare the IR35 status by issuing a Status Determination Statement (SDS). An SDS is a document that states the IR35 status assessment of the worker (either inside or outside IR35) and the reasons for the outcome of the assessment. If the contractor is inside IR35, they must be paid via PAYE, but if they are outside, they can operate via a limited company and receive a gross payment for the assignment.

An SDS must be produced for each worker and each contract, and a new SDS must also be issued if the working practices or terms of the engagement change mid-way through a contract. The SDS will also be shared with the rest of the supply chain (for example, the umbrella company or recruitment agency), as the fee payer must also be made aware of the status determination. The only exception to the rules is small private sector clients who are not responsible for deciding the IR35 status of the workers they engage.

If you are offered a contract that is inside IR35, there are a couple of options:

• Continue using your limited company – You can continue using your limited company for assignments inside IR35 and accept the lower take-home pay you will receive. The fee-payer (end client or agency) will deduct income tax and national insurance, and you will receive a net payment for that assignment. Additional taxes will be due when you draw that income from the limited company. Please note that you cannot claim certain business expenses for assignments inside IR35.
• Look for an assignment outside IR35 – If you do not want to accept an assignment inside IR35, you can still find an outside IR35 assignment and negotiate your contracts accordingly.
• Negotiate a higher rate of pay – You could negotiate a higher rate of pay to compensate for any loss in take-home pay for accepting an inside IR35 assignment.
• Switch to umbrella – Switching to a compliant umbrella company is the easiest way to get paid. You will be paid via PAYE, and the umbrella company will deduct the required Income Tax and employee National Insurance and pay this to HMRC on your behalf. You will also benefit from employee benefits unavailable to you when contracting through a limited company.

Are you looking for a compliant umbrella company?

If you are looking for a compliant umbrella company, our sister company, Churchill Knight Umbrella, offers an FCSA-accredited and SafeRec-certified umbrella service for contractors inside IR35.

To learn more about Churchill Knight Umbrella’s PAYE umbrella service, please call 01707 871622 and ask to speak with Churchill Knight Umbrella. You can also request a tailored take-home pay calculation, and a team member will contact you to discuss the service with you.

To learn more about our limited company accountancy services or to register with Churchill Knight & Associates Ltd, please call 01707 871622. You can also schedule a consultation for a time that suits you, and a team member will contact you to discuss your accountancy requirements.