If you are an IT contractor and you are unsure about what being “inside IR35” and being “outside IR35” mean – here’s what you need to know about their definitions when it comes to your contracts.
What does “inside IR35” mean?
HMRC introduced the off-payroll working rules, also known as IR35 rules, back in 2000 as they wanted to ensure contractors who would be classed as employees if there was no intermediary paying them were paying broadly the same amount of tax as employees.
Being inside IR35, therefore, means that HMRC believes that your contract falls inside the off-payroll working rules and they see you as an employee for tax purposes. So, if you fall inside IR35 you must pay income tax and National Insurance contributions in the same way that employees do.
What does “outside IR35” mean?
If your contract is determined to be outside of IR35 then it means that HMRC see you as being genuinely self-employed, and so you can pay yourself in a more tax-efficient way. Being deemed as being outside IR35 usually means you are actively marketing your services, you are working for more than one client and you are working on defined projects (rather than on a rolling contract).
However, it is really important that you understand that your contract must reflect the actual working practices of you and your client, so that you don’t get caught out by HMRC.
Your contract should include details such as the services you will be providing to your client, as well as when and where you have agreed to work. However, it should not include any client demands, such as appraisals and performance reviews.
If you offer a service, rather than a contract for a service, for example, it is likely that you will fall outside of IR35 as you would be able to send someone else to undertake the service in your absence.
Who works out whether you are “inside” or “outside” IR35?
Interestingly, the rules on this vary depending on whether your client is in the public or private sector.
Contractors with clients in the public sector should know that their end client is responsible for determining your IR35 status. They will usually use an independent service or the HMRC “check employment status for tax” tool (CEST) to work it out.
Contractors with clients in the private sector used to be responsible themselves for determining their own IR35 status but this has now changed and since April 2021 the rules state that the end-client, agency or third party that pays you will become responsible for deducting your tax and National Insurance contributions.
If your end client is working out your IR35 status, then they also need to give you a Status Determination Statement (SDS) to explain whether IR35 applies to the contract or not. They also need to be able to show that they have taken “reasonable care” when working out your employment status – otherwise, they could be held responsible if HMRC thinks that it is wrong.
Inside IR35 vs outside IR35 comparison
Your IR35 status has implications on the amount of tax you are going to pay.
When you are inside IR35 you
- Are classed as an employee for tax reasons
- Have to pay National Insurance contributions and income tax as a “deemed payment” at the end of the year
When you are outside IR35 you
- Operate as a proper business and are self-employed
- Are responsible for paying your business taxes
- Can pay yourself in the most tax-efficient way
As with all of our other IR35 articles, the aim of this article is not to provide legal advice to you, we are not able to do that, all we can do is share with you our interpretation of the significant changes the IR35 legislation is bringing to the world of IT contracting.
If you have any further questions about any of the IR35 reforms, please feel free to email Jonathon Webley (Managing Director) at email@example.com or ring him directly on 0161 416 6634 or 07941 798 021.