When you’re looking for a new contract, there’s a lot you need to think about: this will include the location, the day rate, the nature of the work and the deliverables involved.
Crucially, you need to know whether your prospective new contract is inside or outside IR35. If you’re a seasoned interim, you’ve probably already encountered this and have a good idea how it affects you. But if you’re new to interim roles, you’ll need to get acquainted with it.
As an interim, you must understand how IR35 works, as well as how – and when – it applies to you. In this guide, we’ll take a closer look at what IR35 means for candidates.
What is IR35?
IR35 is a piece of tax legislation, introduced in April 2000, which is designed to combat tax avoidance by contractors who are essentially employees, but who work for clients through intermediaries such as limited companies. It aims to ensure that these workers pay similar taxes to those who are in direct employment.
If a role is described as ‘inside IR35’, this means that the contractor is considered an employee for tax purposes – meaning that the employer or client is responsible for deducting income tax and National Insurance payments. Roles described as ‘outside IR35’ mean that the contractor is considered to be genuinely self-employed, and is therefore responsible for paying their own taxes.
What does IR35 mean for candidates?
IR35 may have a number of implications for leadership-level job candidates.
While there are interim leadership-level roles which are inside IR35, a lot of these contracts are outside IR35. Candidates must familiarise themselves with the related tax implications – including income tax and National Insurance – and how these will affect their take-home pay and other benefits.
Before accepting a contract, therefore, candidates must make sure they understand the IR35 status of the role in question. If this is unclear, you can request a status determination statement (SDS) from the employer/client to clarify whether or not the role is outside IR35.
If a role is outside IR35, candidates may be better off as they can work through their own limited companies and arrange their own taxes, rather than paying via PAYE. They may therefore be able to take advantage of tax efficiencies which aren’t available to roles that are inside IR35, such as claiming business expenses. Contractors outside IR35 often value the flexibility these contracts offer.
If you are unsure about the potential implications of a role that’s outside IR35, it’s a good idea to seek professional advice. Specialist recruiters and tax professionals will be able to tell you more about the tax implications of a particular contract and help you navigate your obligations under it.
Candidates must ensure that they comply with any obligations they have under IR35. If you accept a contract that’s outside IR35, therefore, you must understand your tax responsibilities, maintain accurate records, and ensure that your tax returns are complete and filed on time. Likewise, any taxes must be paid before the specified deadline, or you could incur additional fines from HMRC.
What are the implications of working inside IR35?
Working inside IR35 means that for tax purposes, the worker is treated as an employee rather than a contractor. This has a number of implications – that you must be aware of before entering into any such contract.
In particular, workers inside IR35 must pay income tax and employee NICs on their earnings, which increases the administrative workload for both the intermediary (such as a personal service company or umbrella) and the client. Because of the greater tax liabilities that come with working inside IR35, a worker may have lower overall take-home pay compared to counterparts working outside IR35.
Also, for people working inside IR35, the ability to claim expenses back is significantly restricted. For example, subsistence and travel expenses are not usually claimable for those who are deemed to be working inside IR35.
People who are inside IR35 must also be processed through payroll, which often involves using PAYE to deal with tax and NIC deductions. However, despite being taxed as employees, workers inside IR35 typically do not receive the full range of employment rights – including holiday, sick pay and pension contributions – to which regular employees are entitled.
Some workers inside IR35 may use an umbrella company, typically through a recruitment agency, instead of a personal service company. This can simplify tax compliance and reduce the administrative burden, as well as entitling these people to statutory employment rights because they are technically counted as employees of the umbrella company.
Contractors who do not want to incur the costs and effort associated with running their own personal service company may find it easier and more cost-effective to use an umbrella instead. For people working on short-term contracts, therefore, an umbrella company can provide a simple and flexible solution.
Essential advice – and how we can help
For candidates seeking interim leadership-level jobs, as well as other contractors and freelancers, IR35 is an important consideration. The obligations that go with it might seem complex at first, but by educating yourself about IR35 and your responsibilities under it, you can successfully navigate these obligations and avoid falling foul of the taxman.
If you’re at all unsure about whether you should accept a contract that’s outside IR35, do make sure you speak to an expert. They’ll be able to explain to you what IR35 means and what bearing it might have on you, including the potential financial implications.
At Intuitive, we’ve specialised in helping talented candidates find rewarding interim leadership roles in the UK public transport sector for more than a decade. Get in touch with our friendly, helpful and knowledgeable team today at say-hello@intuitiverecruitment.com and find out more about how we can help you find the right role for you.
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