Skip links

What does IR35 mean when using IT vendors in the UK and how could your Allies help you out?

The IR35 regulations, which were introduced in 2017 and 2021, were updates to the laws governing off-payroll work that the UK government had planned to abolish. The regulations, which have drawn debate and criticism from both companies and talents, will still be in place.  

They are intended to hold companies accountable for ensuring that the contractors they employ, who are sourced through another business, are genuinely suitable for that status and should not be paid directly from payrolls. Previously, there were some concerns that taxes were not being paid properly.  

The claim that workers perform the same jobs and pay the same tax is frequently made, however it is not supported by the law. Only the nature of the relationship between employees and the employer matters; the type of work being done is irrelevant.  

Since the corporation tax and dividend taxes were combined, the dividend tax system has altered, thus eliminating the tax benefit for contractors, who now pay about the same amount of tax as an employee. 

What is IR35? 

IR35, also known as the “Intermediaries Legislation,” is an anti-avoidance tax regulation in the United Kingdom that aims to identify individuals who work as contractors or freelancers but are, in reality, employees for tax purposes.

It has caused some great changes in the IT business. Companies and contractors all over the UK are still trying to find the balance in their adaptation to these new regulations. 

The term “IR35” refers to the Inland Revenue’s press release from 1999, which introduced these regulations. The legislation is designed to identify contractors and businesses which are avoiding paying the appropriate tax.  

The regulation’s purpose is to determine whether these contractors are genuinely self-employed or should be treated as employees for tax and tax-related National Insurance Contributions (NICs) purposes. 

If a contractor is deemed to be inside IR35, they are considered to be working as an employee, and their income is subject to PAYE (Pay As You Earn) tax and NICs, just like regular employees.  

On the other hand, if a contractor is outside IR35, they are regarded as genuinely self-employed, allowing them to benefit from different tax treatment. 

The legislation was introduced to ensure fair taxation and protect employment rights. IR35 has undergone several updates and changes since its introduction. However, both contractors and hiring companies meet difficulties in the process. How could an outsourcing company help you in such a situation? Read below. 

What difference does IR35 make for contractors? 

IR35 has significant implications for contractors in the United Kingdom. Contractors are individuals who provide services through their own limited companies rather than being directly employed. 

Under IR35, the determination of a contractor’s employment status for tax purposes is crucial. If a contractor is deemed to be working “inside IR35,” it means that their engagement is an employment relationship, and they are subject to PAYE (Pay As You Earn) tax and National Insurance Contributions (NICs) as if they were an employee. In this case, the responsibility for taxes and NICs shifts from the contractor to the client or hirer. 

On the other hand, if a contractor is working “outside IR35,” they are considered to be genuinely self-employed. Contractors outside IR35 can enjoy certain tax advantages, such as the ability to pay themselves through dividends, which can result in a favorable tax treatment compared to employees. 

The impact of IR35 on contractors is significant. Those working inside IR35 may experience a reduction in their take-home pay due to higher tax and NICs contributions. They may also lose certain tax advantages associated with self-employment, such as claiming certain expenses. Moreover, contractors working inside IR35 may not be entitled to employee benefits such as sick pay, holiday pay, and pension contributions. There is often no space for discussing a promotion or their salary which demotivates valuable talents. 

How to create a positive change for our teams? Establishing transparent communication with augmented team members is vital for the client companies in discussing the IR35 status of every talent. With the opportunity to address any concern contractors build a positive attitude toward the working relationship and understand the reasons behind the decision.

Additionally, nearshoring partners such as Expert Allies who are used to the IR35 environment accelerate the relationship between the company and the contractors. Outsourcing vendors are the key factor in facilitating these relations when considering a promotion, for example. 

What influence does IR35 have on the British companies? 

To determine whether IR35 applies, HM Revenue and Customs (HMRC) assess various factors, such as the level of control the contractor has over their work, their ability to provide a substitute, the presence of financial risk, and other aspects that distinguish employment from self-employment.  

The responsibility for determining IR35 status was initially with the contractor, but from April 2021, for medium and large private-sector organizations, the responsibility shifted to the client or hirer. This process requires a careful evaluation of the working relationship and contractual terms. 

For client companies in the United Kingdom, IR35 represents a shift in responsibilities. In order to assess IR35 status accurately and maintain compliance with the regulations, reviewing existing contracts, engaging with contractors to gather necessary information, and making fair and accurate determinations are vital. If a contractor is considered to be inside IR35, this may result in increased costs for the client company compared to engaging contractors outside IR35. 

Client companies often choose to engage with outsourcing firms to access external expertise and assistance in navigating IR35 compliance. By proactively addressing IR35 compliance and staying informed about any updates or changes to IR35 regulations, client companies can ensure they engage contractors in a compliant and responsible manner, minimizing legal and financial risks. 

Leveraging Outsourcing to Navigate IR35: A Solution for British Companies 

IR35, the tax regulation aimed at identifying disguised employment and ensuring fair taxation, has posed challenges for British companies in engaging contractors and freelancers. However, smart and strategic outsourcing can provide a viable solution for businesses seeking to navigate the complexities of IR35 while benefiting from cost efficiencies, specialized expertise, and scalability. 

Hiring a firm from abroad often provides a risk-free avenue, as the responsibility for compliance typically lies with the software house.  During an economic downturn, businesses may experience fluctuations in their workload and project requirements. Nearshoring gives you flexibility and scalability. 

Outsourcing vendors often have a diverse team of professionals with knowledge and expertise in various technologies, frameworks, and industries. By outsourcing, companies can tap into a broader talent pool and access specialized skills that might not be available internally.   

During challenging economic times, companies need to allocate resources strategically and concentrate on activities that drive revenue and growth. By outsourcing software development, businesses can offload development tasks to external experts and allocate their internal resources more effectively. This abundant IT talent enables faster development by delivering software projects efficiently and within specified timelines.

By working with an outsourcing firm, British companies can mitigate this risk as the outsourced professionals are not considered their employees. This distinction helps companies maintain their contractual relationships without falling within the scope of IR35, thus safeguarding them from potential tax and legal liabilities. 

Furthermore, Expert Allies has a long track record of working with UK clients and is used to the IR35 environment. Having an outsourcing Ally by your side creates a field for open discussion about the concerns that may occur in the process. 

For instance, for lots of companies, having contractors from abroad means they cannot easily promote their augmented team members, due to fears of breaking IR35. And as we all know, that is a great factor in motivating software engineers. Depriving your company of that would inevitably lead to domain knowledge and talent loss.  

However, we have a procedure of facilitating those processes, so that you are still at the wheel, while your trusted vendor does all the heavy lifting. Learn more about outsourcing here. 

To sum up  

The main argument in favour of IR35 is the presence of cases which would be considered as avoiding the payment of the correct Income Tax and National Insurance. Moreover, the supporters would argue that it is unfair for two workers performing the same tasks to pay different rates of taxes when there is no difference between their working arrangements. 

Contractors, clients, and hirers should stay updated with the latest regulations and consult professional advice to ensure compliance with the law. That is the only way to tackle the current situation in the UK. 

By partnering with reputable outsourcing Allies, businesses can benefit from cost savings, specialized expertise, flexibility, and enhanced productivity. Working together, these British companies and their outsourcing Experts can not only ensure compliance with IR35 but also unlock the full potential of their projects, driving growth and success in a competitive market landscape. 

If you want to double the workforce of your company with a team of Experts, call your AlliesExpert Allies.   

This website uses cookies to improve your web experience.