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Are you employed or self-employed? And why does it even matter?

Why should I be concerned about IR35?

You should be concerned about IR35 because if HMRC take a different view to you on whether you are employed or self-employed, you and your ‘employer’ may end up owing a lot more tax than you first thought.

For most people it’s obvious whether they are employed or not.  If you go to the same place of work every day, have employment rights like sick pay and holiday, receive a pay slip at the end of the month and are paid by the same employer then you would usually be considered to be employed.

However, what about if you work for yourself, either as a sole trader or through your own company?  If you have many different clients that you invoice and receive payment from separately then you are probably self-employed.

But what about if all your work is for just one person or company? In that case HMRC may consider you to be employed by that customer.

Why does it even matter?

It matters because employees and the self-employed are treated different for tax purposes. 

If you are employed, then your employer will deduct all your tax and national insurance from you – as well as pay an employer contribution – and pay it all over to HMRC on your behalf.  If you are employed, there are also limited expenses that you can claim back to put against your tax bill.

However, if you are self-employed, then you take care of your own taxes and national insurance, and the ‘employer’ doesn’t have to make any contribution.  You can also claim back far more expenses, thus reducing your tax bill.

This creates a clear incentive for people to want to be treated as self-employed for both employees and employers – and HMRC don’t like that. If you are unsure of the difference between tax evasion and tax avoidance – and which is legal and which isn’t, then read our blog here.

What can HMRC do about it?

They introduced legislation know as IR35 to determine the true nature of employment, regardless of how it is structured on paper, to make sure that people cannot arrange their dealings to artificially reduce their income tax and national insurance bills.

You are deemed to be caught under IR35 if your contract has the same level of risk, responsibility, liability and control as if you were a permanent employee. This means you will have to pay full tax and national insurance as though the income was salary from the employer, and not as dividends from your own company.

Why you need to check

The Investigations Team at HMRC are carrying out more and more checks on what it calls ‘disguised employment’ so it’s better to get ahead of the game now.  If HMRC checks you and decides that you fall under IR35 then you could be facing a big bill for back dated taxes and national insurance and so could your ‘employer’.

HMRC have an online tool here to help you determine your status, whether you are the worker or the person engaging the worker, and help you make sure that you are treating and taxing the engagement in the correct way. It calls them their Tests of Employment and your answers to the various questions on control, substitution and obligation will determine your status – and the tax you have to pay.