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What is IR35?

IR35 is a legislation, which was brought in by the government in April 2000 to ensure that those who are in “disguised employment” are paying the correct amount of tax.

An example of someone who is in disguised employment or inside IR35 would be a permanent employee who was to leave their job on a Friday and then return to the same company the following Monday to do exactly the same job, but on a self-employed basis rather than as a permanent employee. An individual in this situation is deemed to be inside IR35 because they are effectively in the same position as they were before, but receiving the tax benefits available to self-employed workers, without taking any of the risks associated with working in this way.

Does IR35 affect sole traders?

If you are a sole trader then you will be relieved to know that IR35 will not affect you as it is only applicable to limited company directors. However, if a sole trader works for a client on a contract basis in a way in which could be deemed disguised employment, then the end client is at risk of being considered the employer and being held responsible for the individual working inside IR35. In this situation the client would be liable for the unpaid PAYE, National Insurance and Employers National Insurance, not the sole trader. As a result contractors very rarely work as sole traders because companies generally do not want to take this risk and many will stipulate that they will only employ limited company owners.

Recruitment agencies will also not risk being classed as the employer of a sole trader contracting inside IR35. Agencies require a company to act as an intermediary between them and the contractor. This company will either be the contractor’s limited company, which is seen as a separate entity to the individual contractor, or an umbrella company which acts as the contractor’s employer.

How will IR35 affect me?

As mentioned previously, IR35 is not a consideration for sole traders. If you are self-employed and working through your own limited company for numerous clients on multiple different projects then it will be very unlikely that you will be affected by IR35 either.

However, self-employed individuals who are working through a limited company for just one client, in a role that has the same level of risk, responsibility, control, substitution and obligation as a permanent employee could be inside IR35. If you find yourself in this situation then you will have to pay full tax and national insurance contributions (instead of receiving your salary and dividends from your company profits) and will not be able to claim the same amount of expenses. This is the case because you are not deemed by HM Revenue and Customs as taking the financial risks or having the same level of company control as limited company directors and therefore you are not entitled to the same tax benefits.

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