The Contractor’s Guide to IR35: Everything You Need To Know

Whether you are just getting into contracting or a seasoned veteran, IR35 is something that all contractors will have heard. So let’s break down in this guide what IR35 is, how it’s changed over the years, how contractors have been avoiding it and how you can make sure you are not caught out.

What is IR35?

IR35 (which came into being in 2000) is a law that’s intended to stop contractors, freelancers and other self-employed individuals from acting as ‘mislabeled employees’. The aim is for people who are working as employees to earn the right amount of tax and National Insurance (NICs).

A ‘disguised employee’ is a taxpayer who works as though he is a self-employed worker, but who works as if he were an employee. IR35 means that they will be taxed at the same rate as workers, despite not enjoying the employment allowances of a permanent job.

The Evolution of IR35

It used to be contractors who had to figure out and register as IR35-compliant in the beginning. But as fear of failure mounted, the rules changed:

2017: For public-sector contractors, IR35 status determination became the job of the end customer.

2021: These reforms were rolled out to the private sector and many contractors were left in the dark because they received false IR35 status determinations.

Those changes made it much more common for contractors to become "inside IR35" – liable for more taxes but not the holiday pay, sick pay or pensions that people have at work. This both enraged and bankrupted the contractor base.

IR35’s Recent U-Turn: Contractors are Having a Rollercoaster Ride

In October 2022, then Chancellor Kwasi Kwarteng announced a reform of IR35. These amendments — due to become effective in April 2023 — would have put IR35 status back on contractors’ shoulders. This was widely hailed as a victory for the contracting sector, where it promised to end regular misclassifications.

Yet, a few weeks later, the new Chancellor Jeremy Hunt annulled these reforms on the basis of a £2 billion annual cost to the UK economy. This U-turn disappointed contractors, and IR35 misclassification issues were lost as the opportunity for correction went away.

IR35 and Contractors In The Past Couple of Years What Has Happened?

Since its implementation, IR35 has become a thorn in the side of contractors and government. Key milestones include:

2017-2021: This change of responsibility from the vendor to the client caused a misunderstanding and had a lot of contractors "inside IR35". This misclassification meant that contractors had to pay higher PAYE and NICs but no employment benefits.

2021-22: The private sector rollout compounded the concerns, because small and medium-sized companies couldn’t enforce the rules. And some companies eschewed contractors altogether in order to avoid being compliant.

Post-2022: Jeremy Hunt’s IR35 rollback has put contractors back into the same old boat with no legislative relief coming.

When Does IR35 Apply?

IR35 status is not an easy thing for contractors to get wrong, so they need to know what the process is to determine IR35 status. These include:

Timings: The true contractor is a self-employed. Contracts should not mandate set hours and contractors should be able to work around it.

Control: Contractors need to have ownership over the way they complete their services. This should not be a process where the client tells you exactly what to do and is controlling the process.

Substitution: Contractors can always send a replacement to finish the job if they can’t. It shows independence and doesn’t give the appearance of employer-employee.

Mutuality of Obligation: Contractors shouldn’t be obligated to accept all work from a client. Contracts should give them freedom to turn down projects, and to collaborate with other clients at the same time, without exclusives.

How to Avoid IR35

Your biggest preventative against getting trapped in IR35 is an umbrella company.

Benefits of an Umbrella Company

Tax Exemptions from IR35: Umbrella companies directly hire contractors and therefore are exempted from IR35.

Statutory Benefits: Contractors are entitled to employment benefits like holiday pay, sick pay, maternity/paternity leave, and pensions.

Administration is simplified: Umbrella companies do the PAYE tax, NICs, invoicing and expense claims for you so contractors are less administratively involved.

Financial Security: An umbrella company gives you predictable income and is perfect for contractors working in the unknowable markets.

IR35 in the past 5 Years:

The IR35 woes have extended to the contracting market as well:

The Contractor Exodus: Thousands of high-caliber contractors have quit because of the bureaucratic and cost-sharing issues with IR35.

Increasing Use of Umbrella Companies: As the 2017 and 2021 reforms take effect, more contractors have begun using umbrella companies to contain risks.

Client Resistance: There are clients who are averse to contractors, and so they have moved towards more permanent employees over flexible contracts.

What’s Next for IR35?

The IR35 landscape remains uncertain. Requirements are not going away, but the UK government’s budget woes may not make significant changes in the short term. Builders need to be kept abreast of the law and how to work around this.

Need Help Navigating IR35?

Here at Compare Your Pay, we make contracting as easy as possible. If you are thinking of going through an umbrella company, we can match you with one. Contact us to find out more.