IR35 Guide: What Is IR35

IR35 should be assessed separately for each and every contract. You have to decide whether that particular engagement is actually ‘disguised employment’. If someone from outside looked at the work you are doing, and your relationship with your end-client, would you seem like an employee? Are there enough things (written in the contract, the type of work you’re doing, the responsibilities you have, etc) that point to you being properly self-employed?

Obey IR35 - It's the lawIf you decide that your engagement looks more like what a regular employee does, then it is safer to pay earnings as salary. If you don't it will be risky if HMRC choose you for an inspection: you'll owe the difference between the tax and NI already paid and what would be due as an employee. You might also be assessed for penalties and interest on top.

You’re probably thinking 'I’m a pukka, professional contractor, not a chancing wide-boy, so I’m OK'. That’s fine, and the fact that you’re one of our clients reinforces this – we try to avoid taking on chancing-wide-boys (or girls).

That said, there is a huge difference of perception between the consultancy market’s opinions on IR35, and the views of Government and the Tax Authorities. HMRC indicate they consider IR35 should apply to 90% of freelancers working through their own companies. Although this proportion is not backed up by the win stats for cases HMRC has pursued, it is fair to say that there are freelancers who decide to trade ‘outside IR35’ when in fact the work they are doing is very similar to regular employment.

In reality the more specialist, short term, highly paid and independently managed your work the more likely IR35 legitimately won't apply. If you've doubts about your status then one way to reduce risks is to pay yourself a higher amount as salary.

Deciding you're caught by IR35, and paying earnings as salary isn't always the end of the world, and loads of freelancers come to this conclusion. The difference in take home amounts usually equates to between 5%-15% of day rates (depending on your level of earnings). There are restrictions on what travel expenses can be claimed though, and this can often make things trickier where projects involve staying away from home.