What does it mean to be “Outside IR35” and will I be better off?
What does it mean to be “Outside IR35” and will I be better off?
To be “Outside IR35” means that you are a contractor operating as a genuine business, and therefore operating outside the IR35 rules. By contrast, being “Inside IR35” means that, for tax purposes, you are considered to be an employee of your end client, and therefore subject to PAYE.
Who determines my IR35 Status?
Since the introduction of IR35 measure in 2000, Contractors were responsible for determining their own IR35 status. This changed in 2017 when, for contractors in the public sector, this responsibility passed to the hiring organisation, who were faced with determining the tax status of contractors they hired. From April 2021, private sector companies above a certain size threshold, will also have this responsibility passed to them.
How is the determination carried out?
The determination has to consider the following factors;
- Degree of control (how, what, where and when);
- Whether there is any mutual obligation ("MOO") to be offered work or to accept work;
- Where does the financial risk of failure for not delivering the work lie?
- Whether the Contractor will be “part and parcel” of the Client’s business
- Who is providing the equipment to be used by the Contractor?
- Is there external evidence that the Contractor is in business on their own account?
- What is the intention of the parties?
HMRC provide a tool to help determine IR35 status here;
https://www.gov.uk/guidance/check-employment-status-for-tax
Third Party tools and services also exist;
https://www.optimusshield.co.uk/ir35-status-determination-service/
https://www.jonathanlea.net/2019/how-to-produce-a-status-determination-statement-for-ir35/
Does being “Outside IR35” mean I’ll be better off?
If you are deemed to be operating “Outside IR35”, your company will continue to be paid your gross fees by your client, and you will remain responsible for your own business and personal tax affairs. Accordingly, you would generally pay yourself a salary from your company, and probably draw the remainder of income as dividends. This may mean you are better off financially than being deemed inside IR35.
You can check what are sometimes quite complicated calculations with these online calculators:
https://www.itcontracting.com/calculators/ir35-calculator/
https://www.contractorcalculator.co.uk/ir35calculator.aspx
https://www.contractoruk.com/calculators/ir35_tax_calculator.html
If my status is determined to be “Outside IR35” is that the end of the matter?
Contractors should note that HMRC could determine to review their status via an IR35 Enquiry. Enquiries can potentially look back into historic arrangements and can drag on for years. Contractors can take out insurance against these events happening, and it could be wise to consider this if you are unsure of your position.
Some insurance options worth investigating are listed here:
https://contractspy.larsenhowie.co.uk/
https://www.qdoscontractor.com/ir35/ir35-insurance