Inside or outside IR35 – How to determine your status?

If you work as a contractor, the phrase “captured by IR35” might strike fear into your core! All the information you can find about IR35 suggests that you find out if you are inside or outside IR35. But not much of it will tell you in plain terms if you are caught by IR35 and how to work it out. In this article I will explain, from a contractor’s point of view, the key things you need to understand about what determines IR35 status and whether you are captured by this legislation and why it means so much.

Hopefully, you have an idea of what IR35 legislation means. If not, I recommend reading our IR35 guide before continuing with this article. Let’s remember that the fundamental reason for IR35 was to ensure the tax compliance within the flexible workforce and to ensure that HMRC and the Treasury receive the correct amount of tax from everyone. The PAYE model does this very well, but contractors manage their own tax returns, and people make errors or intentionally try to defraud the system.

Who is responsible for determining IR35 status?

The client has been responsible for the IR35 status determination since April 2021. However, as a contractor, it’s wise to understand whether you’re caught by IR35 or not, regardless of the client’s decision. Contractors who want to operate through their own business must be genuinely self-employed, and this is what IR35 measures, “Are you a disguised employee?”. So how do you know, as a contractor, if you are inside or outside IR35?

What determines IR35 status – 4 key things to understand:

1 – Does a permanent employee do the same job?

This sounds like an odd question to ask, but does the person next to you or someone in the company perform the same tasks and duties as you, just as a permanent employee? If the answer is yes, it’s not 100 % certain whether you are caught by IR35 or not. But the question seeks to understand if your skills are required on a project basis or if your skills are actually a permanent requirement.

If a permanent employee does the same job as a contractor, the role should be a permanent one, and if this is true then HMRC would see your role as caught by IR35. The contractor’s justification may be that the requirement is a short assignment with no guarantee of work afterwards. But if you have been with the client for an extended period of time and worked on several projects under the original contract, it might be worth discussing this with the client.

2 – How is the contractor’s work managed?

The idea of a client hiring a contractor is to hire them to fill a skills gap, a gap where they don’t have the skills and knowledge internally, and they don’t have specific instructions on how to do the work. Now, this doesn’t mean they cannot manage the contractor, meaning checking progress, meeting milestones and providing project updates are all fine. But if the daily routine is for the client to provide a list of tasks to be completed and then advise how the contractor will complete the tasks, the role may fall within IR35. If your contractor assignment sounds like this, you may need to be concerned about your status as a contractor to avoid being caught by IR35.

3 – What does the contract say?

When it comes to contract terms, we tend to rely on generally accepted terms, so we rarely read the terms and conditions carefully. It’s by far easier to tick the little box. And hey if it’s not legal then it doesn’t count right? But as a limited company contractor, you have to know what’s in the contract and what determines IR35 status. Ignoring these things could be the first stumble on a very long road to a tax penalty.

4 – Do you take advantage of the benefits offered by the employer?

We all like the benefits an employer offers, but unfortunately not all of us should be able to get them. Employee benefits are just for employees, and if you, as a contractor, get an invitation to a Christmas party, use of the company car or discounted meals in the canteen, you may question your IR35 status. As a contractor, you should not accept any of the benefits provided to employees to ensure you are not caught by IR35.

Find out when IR35 applies

And this is how you determine when does IR35 apply – Take a look over your current assignment and compare yourself to the points above. These questions will give you a good idea of whether or not you are within IR35. There are of course many other elements you can take into account, but if you follow the explanations above, you have a good chance at being a contractor and not a disguised employee.