Does IR35 apply to limited companies?
IR35 could affect you as a contractor if you work for your own limited company. In this case, you’ll need to understand how the legislation works and apply best practice. This means you must meet HMRC’s definition of self-employment by making sure:
- Your work is project-based
- You are not managed by anyone client-side
- You haven’t offered exclusivity to any clients
- You have contracts linked to the completion of services, as opposed to a continuous relationship.
If your contract is deemed to be inside IR35, it is possible to continue working through a limited company. Your client will have to deduct income tax and NIC for this contract.
Contractor take-home pay outside IR35 could prove significantly higher than inside IR35. Contractors outside of the legislation can benefit from reduced NIC by taking the bulk of their income in dividends (as it stands, you can earn up to £1,000 in dividends before you pay any income tax on them ). Inside IR35, your income is subject to the same level of taxation as a normal employee. There are IR35 calculator tools available to assess the impact the legislation has on your net income.
Can IR35 impact an umbrella company or sole trader?
IR35 is unlikely to apply when you work through an umbrella company. This limited company employs contractors and acts as a third-party supplier between the contractor and the client.
In this instance, you don’t normally need to worry about IR35 as you’re already paid through the PAYE system and work under a contract of employment with the umbrella company.
IR35 doesn’t apply to sole traders either, but rules for determining employment status do. This means that if the contractor is registered as self-employed but is found to be working as an employee, the end client will be responsible for paying any additional tax due.
While the contractor holds no liability for their employment status, they may still experience a deduction in earnings as they will have to be placed on the payroll of the company.
The following is a non-exhaustive IR35 compliance checklist of some of the factors that can indicate whether you are inside or outside IR35. As noted above, you should consider getting detailed advice on your IR35 status involving a review of both your service contracts and day-to-day working practices.
Here are some of the factors that could leave you inside IR35:
- You carry out all of the work that your company is contracted to do personally
- You work for your own limited company, but receive employment benefits such as paid leave or sick pay
- You are being paid on a time basis
- You have close supervision by somebody in your client’s business
- You are supplied with the equipment by a client and work at their premises
- You work for one client long-term
- All rejected work is corrected at your client’s cost
- You do not have your own business identity.
Here are some common features of those falling outside IR35:
- You have the right to delegate or substitute work contracted to another person and that right is exercised in practice
- You work for your own limited company and do not receive employment benefits such as paid leave or sick pay
- Being paid on a project basis or at a fixed price
- You have the right to decide how and when you work and can send a substitute to do the job if you please
- You supply the appropriate equipment and may work from your own premises
- You work with more than one client at one time or on short successive projects with a variety of clients
- All rejected work is to be corrected at your own cost
- You have your own premises, insurance and branding.
IR35 meaning – frequently asked questions
Will IR35 be scrapped in 2023?
No, the IR35 regulations for the self-employed will not be scrapped in 2023. Former chancellor Kwasi Kwarteng had moved to repeal the IR35 rule changes of 2017 and 2021. However, current chancellor Jeremy Hunt later decided against this course of action . As a result, the IR35 system remains in place.
How do I know if IR35 applies to me?
Following the 2021 rule changes, your larger clients will generally be responsible for deciding whether IR35 applies to you. The exact definition isn’t clear-cut. But they’ll normally review whether your relationship is the same as if you were a formal employee .
Can I dispute an IR35 decision?
Yes, contractors can formally disagree with the IR35 status that a client gives them. It’s possible to raise a disagreement until your final payment. The client needs to give you a response within 45 days.