IR35 Explained: 7 FAQs about IR35 for freelancers

1. What is IR35?

IR35 is a tax law introduced to prevent independent contractors and their end-clients from avoiding tax by providing services through an intermediary company in a manner that resembles an employee-employer relationship. Introduced in April 2000, it aimed to clamp down on individuals who were perceived by HMRC to be "disguised employees" from engaging with businesses using a personal service company (PSC) to minimise tax and national insurance contributions (NIC). A disguised employee is someone who falsely positions themselves as a limited company to reduce their tax payments. The end-client receiving the services also previously benefitted from this tax loophole as they wouldn't be liable for employment taxes or be required to provide employee benefits.

2. When does IR35 apply?

IR35 only applies to independent contractors and freelancers who provide their services via an intermediary, such as a PSC. The IR35 rules will generally be applicable where the individual would be considered an employee for tax purposes if they were engaged directly by the end-client. The key factor is the nature of the working arrangement. If they operate and act in the same way as an employee rather than being genuinely self-employed, this is known as being “inside IR35”.

3. What does it mean to be outside IR35?

Working in a way that is "outside IR35” means the independent contractor is legitimately self-employed for tax purposes, and as a result, the IR35 rules do not apply. In this scenario, the freelancer or contractor, operating through a company, will be responsible for paying their own tax payments and can enjoy certain tax advantages as they operate outside IR35. To find out the key factors that indicate that a contractor or freelancer is outside IR35, keep reading!

4. What are the new IR35 rules that were introduced in 2021?

From April 2021, new rules were introduced to shift the responsibility from the independent contractor to the end-client (i.e. the company receiving the services) to decide the IR35 status of the contractor. If the end-client determines that the PSC would be considered an employee for the purposes of IR35 (i.e. the contractor is inside IR35), the end-client will be responsible for tax and NIC at normal employee tax rates from all payments made to the PSC. If the end-client assesses that the contractor is outside of IR35, but HMRC find that the contractor was acting inside the scope of IR35, the end-client will be directly liable for tax and NICs to HMRC.

5. How will the end-client assess if the contractor is inside or outside the scope of IR35?

The assessment of whether an independent contractor falls within or outside IR35 rests on the end-client's evaluation of several key factors. Here are some of the important factors that the end-client will consider in their status assessment:

Control: the degree of control the contractor exercises over when, how, and where they carry out their tasks.

Right of substitution: whether the contractor can subcontract or delegate certain tasks to others.

Financial risk: whether the contractor is responsible for financial risks linked to providing the services.

Exclusive service: whether the worker is permitted to engage in other projects and offer services to different end-clients simultaneously.

Integration: whether the contractor is integrated within the business, attending staff meetings, facilities, social events, and given access to employment benefits.

Notice period: if the contractor adheres to the same notice period and terms as employees.

Tools: if the contractor is expected to use their own equipment or if the employer will provide this.

If the facts demonstrate that the contractor has control over their work schedule, can use their own equipment, can substitute the role, and is responsible for financial risks related to the provided services, they will likely be categorised as independent contractors, falling outside IR35. On the other hand, if the employer dictates how and when the services are provided, the contractor uses employer-provided equipment, they are required to accept work that they are offered by the end-client and their role closely mirrors that of full-time employees, with limited ability to substitute the work, they are likely to be deemed as an employee, falling inside the scope of IR35.

6. What are the benefits of being “outside IR35”?

Freelancers and independent contractors operating legitimately outside of the IR35 rules can enjoy several advantages over full-employment, such as:

• It is generally seen as a more tax-efficient way of working, as the contractor is providing services through a limited company, which means they can claim business expenses, reducing their taxable income.

• The flexibility of being genuinely self-employed allows freelancers and contractors to swiftly adapt to fluctuations in service demand and have autonomy over when and how the services are provided to their clients.

• It is often considered a more attractive option for businesses engaging the freelancer or contractor, as they are not required to pay NIC or provide employee benefits.

7. How do I stay outside IR35?

To ensure that you are operating outside IR35, your contracts and working arrangements must be structured in a manner that shows that you are genuinely self-employed. For example, several key factors can demonstrate that you are acting outside the scope of IR35, such as the ability to send a substitute to carry out the services, flexibility in work location, and autonomy in how and when the services are completed. There should also be no expectation that the end-client must offer work to you, and you are not obliged to accept work when it is offered. The relationship must be project-based and not of an ongoing nature. You should be able to use your own equipment to provide the services, and function separately to the business without receiving the same benefits that an employee of the end-client would enjoy.

A well-drafted freelancer contract should theoretically demonstrate that a freelancer is self-employed, maintaining a separate identity and working independently from the end-client. However, this should also be the case in practice when it comes to your working arrangements. You can find our freelancer contract template that includes several options to indicate that you are operating outside of IR35 here.

There are also various tools available to help you evaluate your status, including HMRC’s free check for employment status (CEST) tool.