The Difference Between Inside IR35 and Outside IR35

October 10, 2019

Categorised in: Intermediaries Legislation, IR35,

As a contractor, IR35 is one of the most important legislations, which is why it is important to understand the difference between inside and outside IR35. The rules have a fundamental impact on your take home pay and if you get it wrong you can fall victim of a hefty fine from HMRC. Here, in this article, we will be looking at what the differences are between being inside IR35 and outside IR35.

What is IR35?

IR35, which is short for Intermediaries Legislation, was introduced in April 2000 as a way to combat tax avoidance. Contractors often operated through an intermediary, such as a limited company or umbrella company, in an attempt to disguise their employment.

Introduced to contractors in April 2000, it was also rolled out into the public sector in April 2017 and is scheduled to be implemented into the private sector in April 2020.                                    

Working Inside IR35

To work inside IR35, it means that you will be considered as employee of your end client, thus subject to PAYE. Your IR35 status is assessed based on the following factors:

  • Direction Supervision and Control (DSC)
  • Mutuality of Obligation
  • Financial Risk and Reality
  • Independence
  • Substitution
  • Public sector and IR35
  • Private sector and IR35
  • Consequences

To find out more about compliance, read our blog post What is IR35 compliance?

If you are found to be working inside IR35, simply put, this means that you have the same responsibilities or benefits as someone who is a permanent employee and your earnings for that contract will be considered the same as a permanent worker. As a result of this, you will have to pay a ‘deemed payment’ at the end of the relevant tax year just like a permanent employee would do so.

In the public sector the end client is responsible for determining the IR35 status, as per the 2017 public sector reform, and should HMRC find you inside IR35 then you will have to pay back owed taxes and contributions for these contracts, and potentially a penalty.

Working Outside IR35

To work outside IR35 means that you are not considered as an employee of your end client and thus operating as a genuine business. Working outside IR35 means that you are able to pay yourself a salary, remaining responsible for your own taxes.

For a contract to be outside IR35 it needs to state that you are working for your end client on a project-by-project basis and there is no obligation for your end client to provide you with work once the project is complete. If this is the other way round and there is an obligation to provide further work, this contract then falls inside IR35.

A contract that is outside IR35 also needs to state that, if necessary, a substitute worker can complete the contract work on your behalf, if it states that your end client wants only you to complete the work then it is within IR35. Finally, in order for a contract to fall outside IR35 it must not state that the contractor has a set working pattern. The contractor needs to have full control on how they are going to complete the work. If a contractor is found to be outside IR35 then they can invoice their end clients and pay themselves through their limited company.

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