IR35 is a law that determines whether or not individuals working through intermediaries should be treated as employees for tax purposes.
Taxes such as Pay As You Earn (PAYE) and National Insurance are deducted from the wages of employees. However, if you operate your own limited company there are more possibilities when it comes to how you receive your payment.
As a consequence of this, it is possible for a person who is a director of a limited company whilst also being an employee carrying out substantially the same work, to pay different amounts of tax.
To address this issue, HMRC introduced IR35 to ensure fair taxation for all.
Outside IR35 refers to freelancers or contractors seen by HMRC as not being employees for tax reasons thus enabling them to continue paying taxes and obtaining tax relief via their limited companies.
What Does “Inside IR35” Mean?
Being ‘inside IR35’ means you’re seen as an employee for tax reasons by your agency/end client. This means they must make sure that taxes like Income Tax and National Insurance from your gross earnings are taken out and submitted to HMRC.
Your client/agency also has to decide if you’re an employee and give you a Status Determination Statement (SDS) explaining why.
When you work through an umbrella company, you are automatically inside IR35 which will make sure IR35 rules are followed.
As a contractor working through an umbrella company and inside IR35, your taxes and other statutory deductions will be submitted to HMRC accordingly. You can also calculate your take home pay inside IR35 using this calculator.
What Does “Outside IR35” Mean?
To be outside IR35 signifies that you are legitimately operating a business and are not subject to the rules of IR35.
If your agreement is not within the scope of the IR35, then you can continue paying taxes and receiving tax relief via your company. Contracts under which an individual is regarded as a contractor or self-employed person rather than an employee do not need to comply with the regulations contained in IR35.
When you find yourself ‘outside IR35’, it means that you can pay yourself a salary, take the remainder of your income as dividends, and treat taxation in the usual way.
However, even if one happens to be outside IR35, HMRC might still investigate their tax affairs.
Inside vs Outside IR35 – How to Determine Your Status
Determining the status of IR35 can be difficult. You may reach out to us at DASA Umbrella, we can help keep you compliant with the rules for IR35.
Some factors can affect your status. The following are used by HMRC to determine what is outside IR35 and what falls within it
- Right of Substitution
Must the work be done by you personally? If there is no possibility of another employee taking over from you then this might indicate that you should be considered an employee and therefore fall under IR35. - Right of Control
Do you have control over how the job is done? People who are self-employed often decide when and where they want to work. But if one must work certain hours or in a company’s premises then it could show that their contract sits inside IR35. - Mutuality of obligations
Has the employer got an obligation to offer any employment while yours is also mandatory? Employers have to provide a continuous flow of tasks during their workers’ employment. After delivering contracted works, non-employees can choose not to work again for them.
HMRC will check the written contract (if there is one) and working practices. You must decide your own employment status if you work for a small business – this won’t be done automatically.
Law is complex and individual cases will differ from each other. Meeting some of the criteria does not mean that you are definitely working inside or outside IR35. However, they can help as an indication of whether you’re likely to be.
All workers with Dasa umbrella are inside IR35.
But if you are unsure speak with us – it’s free!
