Is a “consultant” actually more of an employee? That’s what IR35 is here to address.

IR35 is the term for the new working rules pertaining to off-payroll employees. Importantly, the legislation refers to a person’s status as being either inside or outside IR35. For tax purposes, the UK considers an employee as inside IR35, whilst a genuine contractor is outside IR35.

In short, the new amendments are there to stop companies from using ‘disguised’ employees for tax purposes. This is the UK’s updated methodology for determining if a contractor is actually a contractor.

Here, we’ll look at the details that determine whether a person falls inside or outside IR35.

Inside IR35

Specifically, when you are inside IR35, you pay the same national insurance and tax as a permanent employee. You should have the correct PAYE deductions as a regular employee taken from your salary. Also, your employer/client will match your national insurance contributions to the government.

Quite simply, being ‘inside IR35’ means you are paying tax appropriately for your role as an employee. If your role changes, you will need to reassess your status.

If you are found to be ‘inside IR35’ after an enquiry, HMRC will calculate the tax, national insurance contributions, and interest, for the time period. You will also be subject to a penalty if they decide your status was incorrect. This amount can be crippling. Thus, it’s very important to sort your status before beginning work. Those who are genuinely self-employed will be unaffected by the new rules.

As a rule, if you are receiving the same rights as a permanent employee, you are likely to be inside IR35. This includes sick pay, holiday entitlement, sick pay, and certain benefits.

Outside IR35

Generally, being outside IR35 means you are a legitimate contractor receiving a salary from your limited company.

Contrary to an employee, it’s your responsibility to pay the correct national insurance and taxes on the funds resulting from your work. Additionally, you are not subject to PAYE from your contract client. However, you may still be subject to an enquiry from HMRC.

You may want to consult our IR35 checklist to make sure you are accurately operating as outside IR35. There have been plenty of cases of enormous penalties for those found to have incorrect status.

In summary

Beneficially, HMRC has developed an online employment status tool (CEST) for contractors to check their liability under IR35.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

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