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IR35 Rules - a 60 second summary

When trying to remain outside IR35, all freelance contractors face the difficulty of determining whether they're working on a 'self employed' or 'employed' basis for tax purposes.

This quick and easy summary will help you make the determination, and if your tax status is unclear, you'll know what you need to change.

The purpose of IR35 is to stop the technicality of businesses hiring "disguised" employees. A disguised employee is a freelance contractor who is treated in every respect like an employee, but recorded and booked as freelance - generating a tax saving for both the business and the contractor, but without creating the small business culture the tax differences are meant to promote.

The first thing to consider is whether you provide the things you would normally expect from a 'business': letterheads, business cards, advertising, promotions and so on. You should have your own separate premises and business address, and retain other employees rather than being completely owner-operated. All these things are pointers towards true self employment.

The second thing to consider is control and risk. A small business has the inherent right to send any contractor that can get the job done, and is not required to send a specific person. They have the right to refuse work, if desired (this is the "free" in freelance), and provide tools and equipment at their own expense.

Finally, a small business is normally compensated on a per-project basis rather than an hourly basis, per the T&Cs of a quote provided in advance, and maintains signed contracts which clearly spell out the terms of the project (hence "contractor"). If there is any error, or rework is necessary, the small business (the contractor) bears the risk of any related expense - potentially resulting in a loss, rather than profit.

If all of these descriptions apply to your business, it is almost certainly outside IR35 . If the majority of them apply, it is likely - but not certain - that your business is outside. It is important for any freelance contractor to understand the distinctions, and do the proper tax planning with a qualified specialist. Finally, it is important to remember that your IR35 status is not set in stone and needs to be reviewed on a contract by contract basis.

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