If you are an IR35 contractor or IR35 freelancer, you’ll likely need advice on how to proceed within the IR35 legislation.
We’ve complied a short, handy guide to breakdown some of the legislation depending on your company set up and status, to help contractors understand more about IR35 and what things you should consider as a contractor or freelancer.
IR35 and limited company
A personal service company or PSC is a limited company which is often set up by a contractor to operate their businesses and provide services to their clients. Within the IR35 context, a personal service company is often called an intermediary.
Within this limited company, the contractor is usually the sole person within the business, and therefore the only shareholder.
IR35 contractor and limited company; the benefits
- The business is a separate legal entity to the contractor
- It can be a tax efficient way to do business, where the contractor does not need to pay national insurance contributions in the same way as an employee would
- There is more flexibility in how contractors pay themselves – they can use a mixture of salary and dividends to become as tax efficient as possible
- It gives the clients they work with more security – they don’t have to worry about the risk and cost of employing someone on a permanent basis, but can receive the services they need for a one off project
- For employers, it is also cost efficient way getting projects done, where sick pay and holiday pay do not need to be paid
IR35 and sole traders
A sole trader is someone who owns 100% of a business. This exclusive owner is allowed to keep all profits of a business after tax but is also liable for any losses – the business and the individual are legally one entity.
IR35 rules do not apply to sole traders – IR35 contractor rules only apply to those who set up through a personal service company or a limited company as detailed above.
IR35 contractor and sole traders; considerations
Although IR35 rules do not apply to sole traders, there are other considerations to think about. A legislation called the ‘Agency Legislation’ was introduced in 2014 which includes similar but simpler version of the IR35 rules for sole traders. This legalisation covers any sole trader who use recruitment agencies, where the agency is responsible for calculating and deducting the tax and national insurance contributions from the contractors pay.
However, if a sole trader has a contract with a business and HMRC deemed the contractor acting within the IR35 rules, under the term ‘disguised employment‘, then its the company who is liable, not the sole trader. In this circumstance, the business is considered the employer and is responsible for the work of its employee. Any financial liability is held by the employer, not the sole trader, including PAYE, National Insurance Contributions etc. As a consequence of this risk, it is well known that businesses would prefer to work with a contractor under a limited company set up, removing the risk of financial liability,
IR35 and umbrella company
If you are an IR35 contractor, an umbrella company is an alternative way to working than setting up your own limited company. Essentially by joining an umbrella company, you become an employee, thus removing the day-to-day responsibility of running a company that you get with a limited company set up. This includes removing the need to think about how the company runs including time consuming tasks such as admin, accounts, taxes, company set up, payroll, VAT returns etc.
The umbrella company pays you as an employee of the business, where you keep timesheets and invoice for the work you have completed, and the business pays you through PAYE once tax and National Insurance contributions have been deducted.
IR35 contractor and umbrella companies; considerations
This company set up means that the contractor will not enjoy the tax benefits of working outside IR35 because tax and National Insurance contributions will be deducted through payroll as normal. Further fees to join the umbrella company in the first place, may also apply.
But umbrella companies are used by those IR35 contractors – why is that? Because some contractors want to actively avoid the amount of admin and risk that comes along with running your own company. Especially if you are just testing the water or are new to the contract, interim or freelancer world. You may want to test it out first, get your bearings and re-consider company set up later. Thirdly, some contractors like the security of using an umbrella company. Alongside employee status, the contractor can receive employee benefits including sick pay, holiday pay and pension contributions as well as any other workplace benefits the company has on offer.
IR35 contractor; summary
There is no easy answer to IR35 considerations – many IR35 contractors are confused by these new rules, and there is much ambiguity still left in the market. As specialist interim, contract and freelance recruitment agency, we are well versed on IR35 and can help with any questions you have.
If you are an IR35 contractor interested in calculating your take home pay, we recommend using this IR35 take home calculator. However, we also recommend that you speak to a qualified accountant about your circumstances and what you’d like to achieve and they can guide you through the process.
If you would like further information and resources about IR35, visit the government website.