Whether you’re new to contracting or have been contracting for years, IR35 can be difficult to understand. Our short guide aims to explain what IR35 is, why it exists and whether it may affect you as an umbrella employee.
To understand IR35 law and what it means to contractors, it’s important to understand the history behind it.
The history of IR35
Back in 2000, high profile stories came to light about public sector employees resigning from jobs – only to return to work the next day as a limited company. This became known as false-self-employment.
Ministers also worried that the difference between contracting and permanent employment were hard to determine. Individuals would set up a limited company to take advantage of a tax-efficient structure, but carry out the same tasks as a permanent employee. Thus, IR35 was born.
What is IR35?
In short, IR35 comes down to one crucial factor: are you a full employee or a genuine contractor?
The aim of the IR35 legislation is to decide if the work you're doing should really be classed as full employment, rather than genuine project-based contracting work. If you're a genuine contractor, you'll be outside of the legislation and can take advantage of the tax efficiency associated with working through a limited company.
If your role is classed as employment, however, HMRC might say that you’re inside IR35 – meaning you’ll need to pay Income Tax and National Insurance on your earnings just like an employee would.
I’m with an umbrella company – do I need to worry about IR35?
As an employee of Parasol, the good news is that you won’t be affected by IR35. The legislation only covers self-employed contractors, so there's no need to worry.
If you’re a limited company director, our sister company ClearSky Contractor Accounting have an essential IR35 guide that can help.
IR35 for Public Sector Workers
If you work as a limited company within the public sector, you may be subject to IR35 legislation changes from the 6th April 2017. As an overview, the changes mostly affect who decides whether or not a contract falls inside or outside IR35. Typically, it would be the contractor who makes the call on whether or not the assignment is in or outside IR35. However, from April 2017, for contractors working within the public sector the decision will fall to the public sector body who must inform the body that pays the contractor. Those working in the private sector or under an umbrella company are not affected by these changes.
Need more help?
We understand that there may come a time where you'll want to take the next step in your contracting career and set up a limited company. That's why our sister firm, ClearSky Contractor Accounting, is on hand to answer any queries you may have about the legislation.
ClearSky offers all clients on their Assure and Executive packages a free assignment review service, meaning you'll receive expert guidance as to whether your project is inside or outside IR35. This is just another example of our commitment to be with you all the way.