WHAT IS IR35?
IR35 is a set of tax rules introduced by the government to tackle tax evasion. In simple terms, it ensures that contractors who are working like permanent employees, pay similar taxes to them.
Before April 2021...
It was the contractor's responsibility to determine whether they fell inside or outside IR35.
Since April 2024...
Medium and large private sector companies are required to assess the IR35 status of the contractors they engage and are responsible for determining whether the contractor should be taxed as an employee or as self-employed.
What should you do?
Clients should assess their working relationship with contractors to decide if they fall inside or outside IR35. This can be done using HMRC’s CEST tool, which provides a clear assessment based on contract details and working practices.
DOING A CEST ASSESSMENT
Use HMRC's CEST tool to determine whether a contractor falls inside or outside IR35. It asks specific questions about the contractor's role, working practices, and contract terms. While the results from CEST are not legally binding, they provide a solid foundation for making an informed decision.
As highlighted by HRMC, you will need the below information before you complete the tool:
Details of the contract
The worker’s responsibilities
Who decides what work needs doing
Who decides when, where and how the work is done
How the worker will be paid
If the engagement includes any corporate benefits or reimbursement for expenses
Please see below a list of questions on CEST which line managers we work with often ask their internal IR35 Specialist for further guidance/clarification on:
Does your organisation have the right to decide how the work is done?
Do you have the right to reject a substitute?
Are there any ownership rights relating to this contract?
Will the worker have to buy materials before your organisation pays them?
WHY HIRE AN OUTSIDE
IR35 CONTRACTOR?
Access to a wider talent pool:
Many skilled contractors (around 35%) refuse to take inside IR35 contracts, so hiring outside IR35 ensures access to top talent.
Enhanced contractor engagement:
Hiring outside IR35 fosters a better candidate experience by showing you trust the contractor’s autonomy, which can improve motivation and productivity.
Cost savings:
With outside IR35 contractors, you avoid additional costs such as National Insurance contributions, employee benefits, and administrative overheads.
BENEFITS TO YOUR BUSINESS
Hiring contractors outside of IR35 can bring a range of benefits to your business, including:
Increased flexibility in managing projects.
Reduced risk of tax investigations as the contractors handles their own tax liabilities.
Access to specialised skills without long-term commitment.
WHY SOME CONTRACTORS WON’T TAKE INSIDE IR35 ROLES
Significant reduction in take-home pay: Inside IR35 contracts result in lower net pay. For example, a contractor earning £400 per day inside IR35 could take home £1,700 less per month compared to an outside IR35 role. A £600 per day rate could lead to a £3,021 per month difference in net pay.
Tax complications:
Contractors face higher taxes and administrative challenges when switching between inside and outside IR35 roles during the same tax year.
