I’m a Contractor, How Will IR35 Affect Me

Self-employed workers may soon be facing a higher tax bill due to changes in legislation coming into effect this April 6th. IR35 is designed to hammer down on tax loopholes being exploited by freelancers who are in fact operating through a company.

In 1999 HMRC introduced IR35 in order to crack down on freelancers who work under the guise of a limited company. If you’re an individual who works through a private company, you most likely pay a lower income tax and have no national insurance.

Previously it was at an individual’s discretion to determine whether they fell under IR35. From April, the responsibility will fall onto the businesses to decide the status of their contractors.

Unfortunately, IR35 looks to be a complicated and harsh tax regime that will really hit the freelancing and contracting industry in a big way. HMRC will be bringing in an extra £3.1bn in tax revenues between 2020 and 2024 from the scheme.

Do I fall in or outside of IR35?

For contractors unsure whether they fall inside IR35, the key factor is how flexible their position is…

Outside of IR35

  • You deliver work for a fixed fee
  • You are paid towards the end of a project
  • You work for different clients at the same time
  • You determine where, when and how you work

Inside of IR35

  • You have preset working hours that you must abide by
  • You have a set location of where and how you work

Under the new off-payroll rules, the end-client will determine whether or not your contract falls within the IR35 net or not. The burden will fall on the organisation contracting the work rather than the worker, which offers some relief for those unsure of where to place themselves. However finding yourself in the latter could mean a considerable loss of income of up to 20%. A brutal reality for those affected. If you disagree with an IR35 status decision then you can enter into a process in which the end client must review the decision and give a fair response within 45 days.

Will there be penalties?

Throughout the first year, clients will not have to face penalties in the first year to ensure an easy transition. However, deliberate misconduct will not have these same luxuries or be so forgiving.

Who is exempt?

The changes will only apply to larger companies in the private sector. Small businesses who meet at least 2 of the below criteria will be not be included:

  • Turnover which doesn’t exceed more than £10.2 million
  • Balance sheet which does not exceed more than £5.1 million
  • Number of employees 50 or less

If you are a sole trader and run your own business you could also be exempt from IR35. You must ensure you are personally liable for business losses and don’t operate through a company structure in order to qualify.

Still unsure? Use this service https://www.gov.uk/guidance/check-employment-status-for-tax to find out if you, or your worker, should be classed as employed or self-employed for tax purposes.