What is IR35?

IR35 is government legislation introduced in 1999. This law grants HMRC the power to change the tax status of contractors from a limited company to an employee.

However, despite being designed to target disguised employment, the legislation has also widely impacted legitimate contractors.

Why was IR35 introduced by the government?

During the 90's there were a growing number of contractors that owned limited companies. They contracted themselves out as full-time workers and use this to reduce taxes.

This allowed contractors to become 'disguised employees' and pay different taxes and national insurance contributions. 

To combat this, the government partnered with HMRC to determine when somebody was legitimately employed. This has been a controversial move that has yet to be addressed.

How does IR35 work?

When contracting your work to another company you can be considered independent, or as an employee of that company. There are several factors that HMRC use to determine this on a case-by-case basis. 

These factors include whether you maintain:

  • the right to control your costs, hours, equipment and staff;
  • the right to provide substitution at your discretion;
  • the right to refuse further work and no obligations to continue work;
  • the responsibility to bring your own equipment at your own cost;
  • the responsibility for your own finances and invoicing;
  • the responsibility over your own transport, catering and costs.

In short, you need to show to HMRC that you're a separate entity from the employer. However, in recent years, many contractors have chosen to use umbrella companies. These companies cover some of the responsibilities for invoicing and accounting, while allowing for you to still claim expenses.

This approach is becoming increasingly popular because HMRC often penalise contractors for tiny IR35 infringements. You can read our article about what umbrella companies can offer if you would like to learn how it works?

How to be compliant with IR35?

Becoming compliant with IR35 legislation requires you to own your limited company; control all of your work; and avoid supervision or direction from the client. 

The main steps to compliance are covered above in how does IR35 work - but you can read below for information on supervision, direction and control. These three characteristics help determine if you're inside IR35 or not.

You can find out more in our IR35 compliance checklist

How to avoid IR35?

The best way to show HMRC that you're outside IR35 is through demonstrating control, direction and supervision. We've covered it in great detail already, but here's a summary for you:

Supervision - if you are supervised or watched over during your work, this would count as supervision. Whether this is to ensure the quality of your work or giving guidance on how to do your job.

Direction - if you are directed by a person from your client's company such as a project manager or director - then this would show you do not have sole direction. This could include them asking for you to take on other work outside of the initial contract or completing certain tasks not agreed upon.

Control - demonstrating that you can choose how much work, if any, that you would like to take on. This includes the hours of availability and the quality of the service provided.

You can find out more about this on the gov.uk website