Why Hiring Contractors ‘Inside IR35’ is a Bad Idea

Since the Off-Payroll Working rules (IR35) came into force for the private sector on 6th April 2021, they’ve been causing headaches for contractors and end-clients alike. Indeed, they’ve been described by some as a ‘tax nightmare’.

The rules were brought in to stop companies using contractors (for whom they don’t have to pay National Insurance Contributions) as full-time employees in all but name.

The responsibility for determining whether a contractor should be ‘outside’ or ‘inside’ IR35 lies with the company, but as some recent high-profile IR35 cases have proven, the contractor can find themselves liable for underpayment down the line.

What does it mean to be working ‘inside IR35’?

A contractor is considered to be inside IR35 if, for all intents and purposes, the services are being provided in a similar way to employment. Some factors that might determine a contractor to be inside IR35 include: 

• The contractor is expected to work based on a schedule set by the employer 
• The contractor is unable to subcontract any of the work involved
• The contractor is unable to take on more clients
• The employer provides the contractor with company equipment
• The contractor is required to work from the company premises at least some of the time

If a contractor is deemed to be inside IR35, there are some implications you should be aware of.

For companies

There are two primary considerations for companies working with contractors: that the responsibility for determining IR35 status is with them, and that there’s greater legal risk in doing so.

Increased responsibility

If you’re engaging contractors it is up to you to determine whether or not they fall inside or outside IR35. This will require assessments to make an accurate judgement, because if you fail to do so, you may be liable for unpaid taxes and NICs.

Compliance and legal risk

Businesses face financial penalties and potential legal consequences for failing to comply with IR35 regulations, which makes it incredibly important to conduct thorough assessments and maintain accurate records.

The fee payer—the organisation paying the Personal Service Company (PSC) that ‘employees’ the contractor—will also be responsible for:

• Making PAYE RTI submissions to HMRC
• Deducting PAYE tax
• Deducting NI
• Paying employers’ NICs

For contractors

What are the considerations for contractors that are working inside IR35?

Working under an umbrella company

If a contract falls under IR35 you may need to use an umbrella company that will act as a third-party employer for fixed-term contracts. This umbrella company will organise payment between the client and the contractor, and ensure all taxes are deducted and paid.

When using an umbrella company you’ll have to sign an employment contract with that company and essentially become their employee, so technically you’ll no longer be self-employed.

You can’t claim expenses

When inside IR35 you’re unable to claim everyday expenses like travel, mileage, hotels and food when doing your tax return.

Less favourable tax rate

Contractor assignments within IR35 are taxed at a similar rate to regular PAYE employees, which means the contractor has to pay NICs and income tax as if they were an employee. As a result, inside IR35 contractors miss out on the usual tax benefits of working through a limited company. 

The complications of the inside IR35 rules mean many contractors and end clients wish to avoid these arrangements. However, to ensure you remain compliant regardless of your working arrangement, you should work with an experienced accountancy provider.

At Warr & Co we’ve worked with contractors as well as end-clients to ensure IR35 compliance, and provide advice on their obligations.

To find out more why not request a free consultation today, or simply send us a message and one of our expert team will get back to you.