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4 Min. Read

What Is Outside IR35?

What is Outside IR35?

The COVID-19 pandemic has impacted everyone in some form to another. There were changes proposed by the government to the regulations surrounding IR35 before the pandemic hit. But there was a delay in rolling them out.

Now that some time has passed, those changes have taken shape. If you are trying to figure out if IR35 applies to you, you are going to either fall inside or outside IR35. Making sure to understand how each of them works is important to know whether or not you will get impacted by the legislation.

So, what does it mean to be outside IR35 and how do you know if it applies to you? Let’s take a look into a few details.

Here’s What We’ll Cover:

What Is IR35?

What Is Outside IR35?

How Do You Know If You Are Inside or Outside IR35?

Key Takeaways

What Is IR35?

IR35 is legislation meant for contract workers who are operating as a limited company or if they are providing services for a third party. HMRC breaks down different contracts and workspaces to determine if the contract workers are inside or outside IR35.

Basically, if HMRC determines a contractor is getting treated the same as a full-time employee they are considered inside IR35. This also applies if the contractor receives the same types of benefits compared to a permanent employee. The idea is that sometimes these contractors are disguised as employees and might be tax avoiders.

HMRC will conduct an investigation to find out if a contractor is working under a limited company to try and avoid paying higher tax. If that happens, the contractor must pay the owed money back to HMRC.

What Is Outside IR35?

If you are considered outside IR35, that means that you are operating a genuine business and are outside of the specified IR35 rules. You are also making sure that you are paying the proper amount of tax and national insurance on any money that you receive from your work.

When you operate outside IR35, you can pay yourself a salary or wage and even draw the income you have left as dividends. But, even if you are operating outside IR35, you are still eligible to get investigated by HMRC.

An important thing to keep in mind is to outline all the details of the services you’re providing in your contract. Also include the details of when and where you will be working.

How Do You Know If You Are Inside or Outside IR35?

There are some different tax implications depending on your IR35 status. Knowing these details is critical in making sure you are following the right guidelines and paying the proper taxes. Here’s a breakdown of the biggest differences between being inside and outside IR35.

Inside IR35:

  • You are defined as an employee for certain tax purposes
  • You must pay income tax and any national insurance contributions
  • You must pay your tax at the end of the tax year through a deemed payment
  • You might not be entitled to the same employee benefits even though you’re considered IR35 for tax purposes

Outside IR35:

  • You are a self-employed, independent contractor and operate as a genuine and proper business
  • You are responsible for all the taxes relating to your business
  • You can pay yourself in a tax-efficient way

Key Takeaways

Knowing whether or not you are going to be inside or outside IR35 is an incredibly important aspect to know before each contract. Since every contract you engage in can be different, each of those contracts can get taxed differently, as well. There are differences in legislation and additional taxes depending on which one you fall under.

When you are operating outside IR35, it means that you are running your business genuinely. It also means that you are outside the specific rules outlined in the IR35 legislation. And, you are paying the right amount of tax and national insurance on any earnings.

Even if you fall inside IR35, you can still operate your limited company. It just means that you must make a deemed payment to HMRC. It can be an overwhelming process to try and assess a contractor's IR35 status.

There’s a lot to take into account, and mistakes or errors can lead to paying higher taxes or getting investigated by HMRC. If you still aren’t sure whether or not you fall inside or outside IR35, take a look at the HMRC website for more information. Or seek legal advice or specialist advice to discuss legal costs.

Did you enjoy reading this guide? Head on over to our resource hub for more great content!