An Introduction to IR35

IR35 is tax legislation first introduced in 2000 which affects freelance contractors. IR35 is more properly known as the 'Intermediaries Legislation'. Since April 2000 contractors have had to determine whether or not each contract could be perceived as 'disguised employment'. The stated aim of the measure was to prevent workers from setting up limited companies via which they would effectively continue to work as employees of their former employer (now their client), but saving on tax. This is known as Friday to Monday contracting.

However, IR35 is a significant concern to most freelance contractors. There is no way to determine for certain whether or not a contract is subject to IR35 unless a dispute between a taxpayer and HMRC reaches the courts. The best way to defend an IR35 position is to avoid it becoming a dispute by taking the necessary preventative measures.

A contract that is subject to the higher IR35 tax regime is referred to as 'IR35 caught'. A contract that is not subject to taxation under IR35 rules is referred to as 'outside IR35'. The objective is to prove that a contract is outside IR35 and therefore be able to draw dividends from the profit of your limited company. Dividends are more flexible than salary and do not attract national insurance deductions. Consequently the net income from your contract is greater.

What are the IR35 rules?

In order to avoid IR35, you need to be able to prove that you are genuinely self-employed and working in business on your own account. This sounds straight forward but in fact, the distinction between employed and self-employed for contractors under IR35 is grey. You can read more about IR35 rules here.

Can I avoid IR35?

Yes, you can, but you need a speicalist contractor accountant to guide you through the maze. The things you'll need to think about include, IR35 rules, how your contract is structured for IR35, IR35 contract working practices and we recommend an IR35 contract review by specialists. Read more about specialist IR35 accountants here.