Highly skilled contractors working in software development, IT project management and many other roles in technology are among those most at risk from changes to IR35 rules.

Although these roles tend to be well paid, the contracts are often structured in a way that means they fall ‘inside IR35’.

In this brief guide, we aim to answer the most important questions about IR35 to help you better understand the rules, how they might be applied and how you can avoid paying more in tax.

What is IR35

Also known as off-payroll working rules, IR35 is a set of tax rules designed to stop ‘disguised employees’ working through limited companies to pay less tax.

If you provide your services through a limited company, you will either be ‘outside IR35,’ meaning that you are legitimately self-employed for tax purposes or ‘inside IR35,’ which means that HMRC classes you as an employee for tax purposes. If you are inside IR35, your client will deduct income tax and National Insurance in the same way they would for a full-time employee.

What is changing

Previously, IR35 rules have effectively been self-policed. However, from April 2021, all large and medium-sized companies in the private sector will make judgements about a contractor’s IR35 status on their behalf. This is likely to lead to many more ‘inside IR35’ judgements.

What factors determine an IR35 judgement

There are a number of key factors when making a decision about a contractor’s IR35 status. Crucially, IR35 status should not be judged solely on the content of a contract, but should reflect actual working practices.

There are three main principles to decide an IR35 status. These are:

Supervision, direction and control - Concerns what degree of supervision, direction and control an end-client has over what, how, when and where you complete your work.

Substitution - Concerns whether you can send someone else - like an employee or sub-contractor - to carry out work in your place.

Mutuality of obligation - Is the client obliged to offer you work and are you obliged to accept it.

What about blanket judgements?

HMRC has reiterated that clients should not apply a blanket IR35 determination to all contractors. They say that each case should be judged on its own merit.

To reduce the risk of an HMRC investigation, some companies have decided that they will simply not use limited company contractors. Instead, some have decided that they will use contractors employed through an intermediary like an umbrella company.

Umbrella companies for tech contractors

Using an umbrella company is one way to avoid the IR35 system. While umbrella contractors still pay tax at the same level as employees, but they also get some additional employment perks that ‘inside IR35’ contractors don’t get. Using an umbrella company is also significantly easier than running limited company, perfect if you want to reduce your stress levels.

For more information about using an umbrella company, speak to a member of the Umbrella.co.uk team today. Call: 0800 121 6513.