Since its introduction in 2000, IR35 (the Intermediaries Legislation) has probably had the most significant impact on contractors that provide their services through limited companies. After all, the financial consequences you could face if HMRC deems you to be wrongly classified are substantial.

IR35 implementation

There was a sharp rise, from the late 1980s onwards, in the number of contractors opting to work via limited companies rather than become employees.

If you work as a limited company rather than as an employee, you will pay less tax overall – as you will not pay National Insurance Contributions (NICs) on dividends. Thanks to the dividend tax hike, it is a smaller differential than in the late 1990s, but it still means it is more beneficial to be a contractor than a traditional employee.

As the number of contractors working via limited companies increased, HMRC began to believe that many of these limited company directors were, in fact, “disguised employees.” So, they worked for the same company daily, performing the same work but claiming they were limited company contractors.

In response to this, the UK Government implemented the Intermediaries Legislation (IR35) in April 2000 to combat what is believed to be a widespread avoidance of NICs and tax by disguised employees.

What are the IR35 rules?

In simple terms, a contract will be subject to IR35 if it is believed that the terms of the contract and the way the contractor performs the role are more like those of an employee rather than a self-employed person.

This would mean that once your 5% allowance to meet the cost of running your limited company is taken off, the remaining revenue will be subject to taxation, including NICs and income tax.

The net return of your contract could be cut by 25% if it is deemed inside IR35 by HMRC.

HMRC amended the IR35 rules in April 2017 to tackle “off-payroll working in the public sector,” following concern that disguised employment was rising in state-run organisations.

At the time, HMRC stated, “this measure moves responsibility for deciding if the off-payroll rules for engagement in the public sector apply, from an individual worker’s PSC to the public sector body, agency or third party paying them.”

How will you know if your contract is inside IR35?

If HMRC investigates you, they will examine your working conditions and the terms of your written contract to provide a clear picture of the true nature of your work.

Some of the things they will look at include:

  • Control – to what extent are you under your client’s direct control and supervision?
  • Mutuality of Obligation – is there a reasonable expectation of renewal when the current fixed-term contract has ended?
  • Substitution – can you provide another person to complete your contractual duties if you cannot?

If you have further questions about the IR35 reforms and how they affect contractors working through limited companies, please email Jonathon Webley (Managing Director) at or ring him directly on 0161 416 6634 or 07941 798 021.

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