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How is IR35 status determined?

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IR35, also known as ‘intermediaries legislation’, or ‘off-payroll working legislation’, is a tax law which seeks to ensure no tax advantage is gained by disguising employment as self-employment. 

‘Disguised employment’ is where a contractor appears to be working for themselves, but in reality acts like an employee of their client.

If this sounds confusing, you are not alone, the rules which govern when IR35 applies are extremely complex, making it very hard to be compliant with the legislation. HMRC frequently lose IR35 cases at tribunal, which has led to criticisms that even HMRC doesn’t understand the rules.

How does IR35 work?

IR35 is based on case law, and therefore built upon the outcomes of each individual case. It works on an engagement-by-engagement basis, meaning it looks at the nature of each contract with a client, not at individual companies.

How is IR35 status determined?

Image block advice 1 How is IR35 status determined

What can I do to comply with IR35?

There are a few simple steps you can take that will dramatically reduce the risk of IR35 being applied to your engagement. The key is to make it clear to all parties that you are not an employee and should not be treated like one. If you have the following in place, it will make it much easier to explain to a client, agency, or indeed HMRC, that IR35 should not apply.

Ensure your compliance...

It’s all about putting clear daylight between you and your client’s employees. The clearer it is that you are not a ‘disguised employee’, the better it will be for your IR35 status.

What happens if IR35 applies?

If IR35 applies there is an increased tax liability. Essentially, the government is looking for the tax that would have been paid, had the engagement been deemed employment.

Public sector changes

Since April 2017, in the public sector, clients have had to determine the IR35 status of engagements. Where IR35 is deemed to apply, the fee-payer (the entity in the chain which pays the contractor) must ensure those payments are made via the RTI system – meaning tax is deducted at source, as it is for employees.

Private sector changes

The off-payroll working reforms (IR35) were implemented in the private sector on 6 April 2021 and moved the responsibility for deciding the employment status of freelancers, to the end-clients for medium and large sized private business clients.

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