IR35 compliance is probably something that most contractors or freelancers working through their own limited company shudder at the thought of!

As correctly adhering to the off-payroll working rules (IR35) set out by HMRC is no easy feat, and can be likened to walking a tightrope of tax admin. 

Except if you put a foot wrong here, you won’t be landing in a pool of water or a bed of soft grass, you could be in for an annoying revision of your tax return or maybe even a full on investigation.

IR35 is designed to make sure contractors are paying the right amount of tax for the way they work. It can affect how much you take home, how your contracts are structured, and even who’s responsible for your tax deductions.

Fortunately at Crunch we help thousands of contractors stay on the right side of the rules, so you can focus on your clients and projects, not paperwork and tax stress. And we’re going to show you how to keep your balance with IR35. Let’s check it out.

What is IR35 (off-payroll working)?

IR35 is a set of rules introduced by HMRC to stop “disguised employment”. Situations where someone works like an employee but bills their client through a limited company to pay less tax.

Basically, IR35 compliance means making sure that your working arrangements genuinely reflect self-employment. If HMRC decides you’re working “inside IR35,” you’ll need to pay tax and National Insurance similar to an employee. If you’re “outside IR35,” you can continue paying yourself through dividends and salary as usual.

The term “off-payroll working” just means that the client pays your limited company directly, instead of putting you on their payroll. But depending on your IR35 status, tax may still be deducted before you’re paid.

At its heart, IR35 is about fairness, ensuring that people who work in the same way pay broadly the same tax. The challenge is figuring out exactly which side of the line you fall on… and that’s where expert support makes all the difference.

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Who does IR35 apply to?

IR35 applies to contractors who work through a personal service company (PSC), in other words, your own limited company, but whose working relationship looks more like traditional employment.

There are two key categories:

The rules apply to both the public and private sectors, although who’s responsible for determining your status can differ (as we will explain).

If you’re not sure which applies to you, it’s worth reviewing your contracts and working practices or getting professional IR35 support to make sure you’re compliant before HMRC comes calling.

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How to determine your IR35 status

Figuring out whether you’re inside or outside IR35 comes down to how you actually work day to day, not just what your contract says. HMRC looks at a few key factors to decide if you’re genuinely self-employed or, in reality, acting as an employee.

Here are the main tests of IR35 compliance:

• Control: Who decides how, when, and where you work? If your client has significant control over your hours, location, or methods, that leans towards employment.
  
  
• Substitution: Can you send someone else to do the job? Genuine contractors can usually provide a substitute, even if they rarely do.
  
  
• Mutuality of obligation: Is there an expectation that your client will keep offering work — and that you’ll keep accepting it? If so, that suggests an employment-type relationship.
  
  

Other factors include how integrated you are within the client’s team (for example, do you use their email address or attend staff meetings?) and whether you take on business risks, such as fixing mistakes at your own expense.

Because these rules can be subjective, many contractors use professional IR35 reviews or tools like HMRC’s CEST checker for guidance. The key is making sure your contract and your working practices tell the same story.

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Responsibilities under IR35

Who’s responsible for deciding and handling IR35 compliance depends on who you’re working with.

If you’re found to be inside IR35, your client (or the agency paying you) will deduct Income Tax and National Insurance before you’re paid. You’ll still invoice through your company, but your take-home pay will look more like that of an employee.

If you’re outside IR35, you’ll continue to manage your taxes as a limited company director. Paying yourself through salary and dividends as usual.

Either way, it’s essential to understand your responsibilities before signing a new contract. Staying compliant now can save you a major headache (and potential HMRC investigation) later.

Keeping IR35 compliance balanced

As you can see, at first glance IR35 can seem like quite an ambiguous and cloudy area of tax legislation. 

The key to achieving and maintaining IR35 compliance is understanding how you work, keeping your contracts up to date, and making sure your day-to-day setup matches your self-employed status.

If you need a contract review, help deciding your IR35 status, or expert accounting support to keep everything above board, Crunch can help you. Just as we have thousands of our happy IR35 clients.

Remember, getting your IR35 position right from the start can protect your income, avoid penalties, and give you peace of mind that you’re playing by the rules.

Speak to one of our experts today and make IR35 compliance simple.

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