Home > Freelancers & Contractors > What is IR35?

What is IR35?

By: J.A.J Aaronson - Updated: 17 Jun 2011 | comments*Discuss
 
Ir35 Contractor Contract Freelance Tax

IR35 is one of the most important concerns facing any contractor. Regardless of the initial intentions of legislators, this tax has resulted in massively increased costs for Contractors And Freelancers alike, and a small industry now exists solely to mitigate exposure to it. IR35 should be at the forefront of your mind when negotiating and fulfilling a contract.

New Tax Rules

The term IR35 is used to describe an addition to the tax schedule which came into force in 2000. The intention was to prevent the practice of 'disguised employment'. Prior to IR35, some professionals had established themselves as 'contractors' when in fact they were employees in all but name. The purpose was to reduce their tax burden. IR35 sought to prevent this by creating a notional contract of employment against which the relationship between the worker and the client is judged.

In reality, IR35 has had expensive consequences for many genuine contractors. Those whose contracts fall within the auspices of IR35 can find their take-home pay being reduced by up to 25%. It is unsurprising, therefore, that a considerable amount of time is put into ensuring that contracts fall 'outside' IR35.

Grey Areas

IR35 has come under intense criticism from professional contractors' groups and individual contractors and freelancers. There is significant scope for interpretation of the rules, with many HM Revenue & Customs (HMRC) judgements being successfully challenged. It is thought that around 60% of contractors have contracts and working arrangements that make their IR35 status very difficult to determine.

It is important to stress that any decision regarding whether or not you fall within IR35 will be based not only on the wording and contents of your contract, but also on your working practices. For example, regardless of what your contract says, there are a number of tell-tale signs of employment that are likely to lead HMRC to find against you. These include a client's insistence on setting your working hours, an entitlement to benefits normally given to staff (which could be as apparently petty as use of the client's company canteen), or an inability on your part to provide a substitute contractor if you are unable to complete the work.

Case Law

Judging whether or not you fall within IR35 is therefore difficult. This problem is compounded by the fact that there is no strict definition of 'employment' or 'self-employment' in statute law. Rather, each case is judged against previous precedent. As such, you can familiarise yourself with previous case law to offer some guide as to whether or not you are likely to be affected.

IR35 should be the first thing you consider when negotiating a contract. There can be a lack of understanding on the part of clients about the nature of the rules, and you may have something of a battle to get them to agree. As such, it is important that you are well versed in the rules before you begin negotiation, and that you have an independent IR35 expert look over every contract before it is signed.

For more information on IR35, read our articles The Top 10 Reasons For Failing IR35, The Financial Impact Of IR35 and Does My Contract Fall Inside IR35? on this site.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Latest Comments
  • chendre
    Re: Claiming Tax Relief on Mileage
    Hi, I've just started working as a self employed courier driving my own car delivering parcels to customers addresses with…
    25 February 2018
  • marley
    Re: What Does Road Tax Pay For?
    Wow so agree with many comments here re blasted pot holes! here in Hertfordshire is same, its dodge the potholes on your journey to…
    25 February 2018
  • TheTaxGuide
    Re: How Will My Second Job Be Taxed?
    Needhelp - Your Question:Hi I work two jobs first one is a full time at 17,300 and the second one is part time at 5,000 how…
    23 February 2018
  • TheTaxGuide
    Re: How Will My Second Job Be Taxed?
    AnnaP - Your Question:Hello,i have 2 jobs,for the first one (part-time)i earn 7200 pounds/year before tax ,and for the second…
    23 February 2018
  • Needhelp
    Re: How Will My Second Job Be Taxed?
    Hi I work two jobs first one is a full time at 17,300 and the second one is part time at 5,000 how much will I get taxed.
    22 February 2018
  • AnnaP
    Re: How Will My Second Job Be Taxed?
    Hello,i have 2 jobs,for the first one (part-time)i earn 7200 pounds/year before tax ,and for the second one( full time) i…
    22 February 2018
  • TheTaxGuide
    Re: How Will My Second Job Be Taxed?
    Moff - Your Question:I have a job earning £8840 per annum so I don't pay tax. If I get a second job earning £5000 per annum…
    22 February 2018
  • TheTaxGuide
    Re: How Will My Second Job Be Taxed?
    MoiraL - Your Question:Hi, a friend of mine has have just hired an employee who they thought had resigned from his job, but…
    22 February 2018
  • MoiraL
    Re: How Will My Second Job Be Taxed?
    Hi, a friend of mine has have just hired an employee who they thought had resigned from his job, but it turns out he's taken…
    21 February 2018
  • Moff
    Re: How Will My Second Job Be Taxed?
    I have a job earning £8840 per annum so I don't pay tax. If I get a second job earning £5000 per annum how much tax will I…
    21 February 2018
Further Reading...
Our Most Popular...
Add to my Yahoo!
Add to Google
Stumble this
Add to Twitter
Add To Facebook
RSS feed
You should seek independent professional advice before acting upon any information on the TheTaxGuide website. Please read our Disclaimer.