IR35: what happens when it goes wrong?
Contractors and freelancers operate through a private company to enjoy a better tax treatment compared to sole traders – but a more favourable tax position is actually never guaranteed because of off-payroll working rules known as IR35.
According to IR35, if a contractor or freelancer has a working relationship with a client that is more akin to regular employment, that worker has to pay income tax and National Insurance contributions on their income, rather than the more generous corporation tax.
This is called ‘deemed employment’, and working out whether you or your contractor are deemed employees can be difficult. At first, the responsibility for determining employment status fell solely on the worker themselves. However, reforms in 2017 for the public sector and 2021 for the private sector shifted this burden to the client engaging a contractor’s services.