What does outside of IR35 mean?

It’s hard to work out, even for the most experienced contractors – what does outside of IR35 mean?

To be outside of IR35 means that in HMRC’s eyes, you’re operating as a genuine business in your own right, and therefore not subject to the IR35 rules.

If you are operating ‘outside IR35’, you can pay yourself a salary, draw the remainder of income as dividends, and remain responsible for handling your taxes.

But how can you make sure you’re outside IR35? HMRC has a tool called check employment status for tax (CEST) which can tell you where you stand. It’s not without its pitfalls, however.

In this post, we’ll run through the steps you should take to check your own status, and guide you on how to work out whether you’re inside or outside IR35.

 

Evaluating your status

Since 6 April 2021, the reforms to IR35 in the private sector have been law. If you’re working as a contractor for a business over a specific size (typically £10m turnover), they, as the end client, are required to determine your tax status under IR35, rather than you having this responsibility.

It’s an incredibly complicated area of tax law, requiring years of experience to know inside and out.

Every situation is unique, making generic advice almost useless, as HMRC works on a case-by-case basis.

Some factors will cast you securely outside IR35, whereas others will point towards an employment-like contract. Understanding these and talking to your accountant directly to find this information is your best option.

Talk to us – we’ll review your case and ascertain whether you’re inside or outside IR35.

 

Check your contract

You’ll need to check your contract before you try and work out whether you’re inside or outside of the rules.

Ensure you look for information regarding working arrangements, substitutes and helpers, and financial risks – all of these are directly related to the questions you’ll be asked if you decide to use the CEST tool.

 

Align your contract and working practices

Your contract must reflect the precise details of your working relationship with the client.

It’s all well and good to have everything clearly outlined in your contract, but are you adhering to the standards it sets out?

If the contract does not accurately represent working procedures – for instance, if your contract claims you’re operating independently but in reality, you’re working in the same way as an employee – HMRC and the courts will not view it kindly.

 

The trouble with the CEST tool

HMRC says it will stand by the verdict the CEST tool gives – but some argue that the results can be inaccurate.

In fact, the tool deliberately omits any ruling on ‘mutuality of obligation’ (MOO), with HMRC stating: “CEST does not explicitly look at MOO, it is designed to determine whether an existing or future contract will be one of employment or self-employment.”

In layman’s terms, MOO exists if as a contractor, you have an obligation to accept work from your client, and they have an obligation to provide ongoing work for you.

Considering how important MOO is, its omission has come into question by many businesses.

It also appears that HMRC is more likely to investigate contractors who receive an ‘outside’ ruling from the tool than those who don’t. This is frustrating for contractors who feel they’re unfairly targeted by the rules – but again shows the importance of checking your contract is watertight and accurate.

Ultimately, IR35 is complicated for every party involved, and the only way to navigate it with certainty is to speak to an accountant.

Get in touch with us today, and we’ll help you to understand if you’re outside of IR35.