Outside IR35 or Inside IR35: How to Determine Where You Fall
by Peter Manley
If you’ve never heard of ‘outside IR35’ and ‘inside IR35’, those terms may sound like some high-caliber government lingo that is either none of your concern or something to definitely be mindful of.
So which is it? The answer, in short, is both. More specifically, it all depends on which of the two categories you fall into.
In all reality, everyone that is involved in the contracting industry in any fashion should at least have a basic understanding of how the IR35 regulations apply. After all, the IR35 regulations have an impact on the pay you take home, especially if you are caught working under the wrong conditions.
If you are in the contracting industry and you have no idea where to start with IR35, don’t worry––we’re here to help. To help you navigate this stuff, here’s a quick and helpful explanation of IR35, such as what IR35 is in the first place, the differences between being outside or inside, and so forth.
What is IR35 anyway?
In short, IR35 is a tax law that regulates what is or isn’t considered tax avoidance in the contractor industry, since contractors typically receive tax advantages. If you’re a limited company contractor that just so happens to work very similarly to a permanent employee (meaning that you work for one client exclusively), the IR35 states that you should pay taxes just as any other regular employee would.
What does ‘Inside IR35” mean?
For tax purposes, being classified as inside IR35 means that you are taxed and treated like an employee to your end-client––regardless of the fact that you may operate as a contractor. Subsequently, you are expected to pay the same amount of taxes as if you were a W2 employee of the client.
If you learn that you are or have been operating inside IR35, then all you have to do, for the most part, is to make sure that you are paying the correct amount of taxes. If you’re unsure about how to go about this, it might be best to seek guidance from an advisor.
What does ‘Outside IR35’ mean?
If you are considered to be outside IR35, this simply means that you operate as a true and genuine business (according to tax law). Because of this, you fall outside of the IR35 rules and regulations and are taxed as a contractor/business rather than an employee.
As far as your typical operations go, this means that you can also pay yourself a salary, draw dividends, and pay taxes as you normally would.
Is one or the other bad?
No, not necessarily. The IR35 simply regulates which tax category you fall into, depending on the nature of your contracting operation. It could be bad, however, if you operate as outside 35, only to find that you have been actually working inside 35 for quite some time. This would result in some tax penalties or at least a difference in your take-home pay.
How do I determine whether I’m inside or outside IR35?
When it comes to the determination of status, there are three fundamental factors that are considered:
- Control and Supervision. Does the client have total control and supervision over the work you perform?
- Substitution. Does client work have to be done by you specifically? Can you have someone else do the work for you?
- Mutuality of obligation. Is your client required to provide you with work or vice versa?
In order to be classified as outside IR35, you have to prove that none of the above three factors apply to you. If they do, then your contract has the potential to be considered inside IR35.
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