Inside or Outside IR35

In this article we will review the implications of IR35, what it means to be inside, outside.

What does this mean?

If HMRC finds that you have been working on a self-employed basis, described as ‘outside IR35’, when, in actual fact, the service you provide your client reflects that of employment, described as ‘inside IR35’, you’ll be required to pay the missing tax back to HMRC, plus interest and any penalties.

Inside IR35

If your contract is deemed to be inside IR35, you’re considered an employee for tax reasons. This means you’re effectively required to pay tax at the same rate as an employee in the same tax bracket. Tax and employment legislation are currently separate. So, whilst you may be considered an employee for tax purposes, you are not automatically entitled to employment rights.

Outside IR35

If your contract is deemed outside IR35, you are considered self-employed for tax purposes and are free to pay yourself in the most tax-efficient way, which is typically through a mixture of salary and dividends taken from your company.
Contractors working outside the scope of IR35 are responsible for making sure all their personal and company taxes are calculated correctly and paid on time.

The implications of working inside IR35?

When working inside IR35, you’ll need to pay National Insurance Contributions (NICs) and Income Tax on your earnings.

For those currently working in the private sector, this is paid via a ‘deemed payment’ which is the payment you will be required to make to HMRC at the end of the tax year, taking into account the extra tax you must pay as a result of working inside IR35.

Like many things related to IR35, calculating the ‘deemed payment’ is fairly complex. That’s why, in many cases, contractors seek professional help in doing so.

Contractors working inside IR35 in the public sector currently, and those working inside the rules for medium and large companies in the private sector from 6th April 2020 onwards, do not need to work this out. Your fee-payer will do this on your behalf and deduct the NICs and Income Tax from your invoice before paying you.