What do IR35 Tax Rules Mean for Freelancers?

Federation of Small Businesses
1 day ago
8 min read

Confused by IR35 rules? Our tax specialists from FSB Tax Investigation Protection explain what the new rules mean for freelancers working in the private sector.

This content was last reviewed in August 2024.

We’re here to help you understand the ins and outs of the off-payroll working changes introduced into the private sector in April 2021, so that you can stay compliant.

What is IR35?

IR35, also known as the off-payroll working rules or intermediaries legislation was originally introduced in April 2000 to tackle what the Inland Revenue (now HMRC) perceived to be disguised employment. It was felt that many individuals trading through their own limited companies and engaged by end clients (your clients) were doing the same work as employees yet enjoying greater tax advantages.

It asks the question: if there was no limited company and the individual was working directly for the end client; would it look like employment (“inside IR35”)? Or self-employment (“outside” IR35)?

If the engagement is deemed to be inside IR35; i.e. considered to be akin to an employment relationship, those working through their own companies should pay the same income tax and National Insurance contributions as those who are employed directly.

What changed in the private sector?

Changes to IR35 legislation came into force on 6 April 2021, following a delay due to the coronavirus pandemic. The new rules have applied to services carried out from 6 April 2021. Although the September 2022 mini-budget announcement suggested that the reforms would be repealed in April 2023, it was only a few weeks later that this repeal was reversed and they remain very much part of the tax landscape.

Under the IR35 reform, the responsibility for determining your employment status rests with your client, where eligible. This was already the case for all businesses and workers in the public sector, where changes were introduced in 2017. However, the private sector reforms did introduce new requirements designed to improve transparency in IR35 decision-making which have also applied to the public sector since April 2021.

Who does IR35 apply to?

Off-payroll working rules apply if you provide services to a client through an intermediary (usually your own company; e.g. a personal service company), but would be classed as an employee for tax purposes if you were contracted directly.

If the rules apply and you’re deemed to be inside IR35, tax and National Insurance contributions must be deducted from your fees and paid to HMRC.

What’s the difference between inside IR35 and outside IR35?

IR35 applies on a contract by contract basis, so you may have some contracts that are inside IR35 and some that are outside IR35. Your status impacts the employment taxes you will pay. How and who pays the appropriate taxes depends upon a number of factors which are considered below and ensures that IR35 still remains a complex piece of legislation.