IR35 and sole traders: 2024 guide

“Is my sole trader business at risk because of IR35?” If you’ve asked yourself this question, you’re not alone. Many sole traders are unsure how the IR35 legislation affects them. Let’s clear up the confusion.

IR35, also known as the off-payroll working rules, is designed to tackle “disguised employment“. This is when someone works like an employee but pays less tax by operating through their own limited company (often called a personal service company or PSC).

The good news? IR35 does not directly apply to sole traders. This is because sole traders are not incorporated businesses, unlike those who work through a limited company.

Why IR35 doesn’t apply to sole traders

IR35 specifically targets individuals who provide services through their own intermediary, typically a limited company (often called a personal service company or PSC). Since sole traders operate as individuals and their business isn’t a separate legal entity, they fall outside the scope of IR35.

The “catch”: Employment status and sole traders

While IR35 itself doesn’t apply, sole traders still need to be aware of their “employment status” for tax purposes. This is especially relevant if you’re working through a recruitment agency, as this can blur the lines between self-employment and employment, potentially triggering agency legislation. If HMRC (His Majesty’s Revenue and Customs) determines that a sole trader is actually operating as a disguised employee, the client could face significant tax and National Insurance liabilities.

Important Note: The financial risk lies with the client, not the sole trader. However, being misclassified can disrupt your work and income.

Understanding employment status: Key factors

HMRC uses several tests to determine employment status. These include the level of control the client has over your work (including how, when, and where it’s done), your right to send a substitute to do the work, and whether there is mutuality of obligation (MOO) – meaning, is the client obliged to offer you work, and are you obliged to accept it?

Other factors HMRC considers include whether you take on any financial risk (such as covering your own expenses), whether you provide your own equipment, and how integrated you are into the client’s business.

Sole trader red flags: What increases risk?

Certain situations can raise red flags for HMRC, such as working exclusively for one client, having little control over how you work, being integrated into the client’s team, using the client’s equipment, and being paid a regular salary instead of project-based fees.

Protecting yourself as a sole trader

To minimize the risk of misclassification:

• Ensure your contracts clearly state that you’re a sole trader and outline the nature of your self-employed services.
• Make sure your day-to-day work aligns with your contract. For example, if your contract says you can send a substitute, make sure you actually have that option.
• If you’re unsure about your employment status, consult an IR35 specialist.

For added peace of mind, consider using Kingsbridge’s IR35 status review service.

FAQs about sole traders and IR35

Can I work for multiple clients to avoid IR35?

Yes, working for multiple clients can strengthen your case for being genuinely self-employed. It demonstrates that you’re running your own business rather than being dependent on a single employer.

Do sole traders need to use CEST?

CEST (Check Employment Status for Tax) is a tool designed for contractors working through limited companies. Sole traders don’t need to use it.

What happens if my client gets my status wrong?

If HMRC finds that your client has misclassified you as an employee, they will be liable for any unpaid taxes and National Insurance contributions (NICs).

What are my tax obligations as a sole trader?

As a sole trader, you are responsible for paying your own Income Tax and National Insurance Contributions (NICs). You must complete a self assessment tax return each year to report your business income and expenses.

Do I lose my self-employed status if I am found inside IR35?

No, IR35 is only relevant for tax purposes. Even if you were found to be inside IR35 for a particular contract (which is not possible as a sole trader), you would still be considered self-employed for all other purposes.

What are personal service companies (PSCs), and how do they relate to IR35?

Personal service companies (PSCs) are limited companies typically used by contractors to provide their services. IR35 legislation is specifically designed to assess the working arrangements of individuals operating through PSCs to determine if they are genuinely self-employed or disguised employees for tax purposes.

Why might a client prefer engaging sole traders over employees or limited company contractors?

Engaging sole traders can be simpler and less administratively burdensome for clients. They don’t have the same employment rights as employees, and the client isn’t responsible for determining IR35 status as they would be with a limited company contractor. However, clients still need to be cautious about misclassifying sole traders as employees, as this could lead to significant tax liabilities.

As a sole trader, do I have the same employment rights as an employee?

No, sole traders are not entitled to the same employment rights as employees, such as paid holiday leave, sick pay, or redundancy pay. However, you have the flexibility and autonomy to run your business as you see fit.

What is the end client’s responsibility when engaging a sole trader?

The end client is responsible for determining the sole trader’s employment status for tax purposes. This involves assessing the working relationship to ensure it aligns with genuine self-employment. If HMRC deems the sole trader to be a disguised employee, the end client will be liable for any unpaid taxes and NICs.

If I’m a sole trader working through a recruitment agency, who is responsible for determining my employment status?

In cases where a sole trader is engaged through a recruitment agency, the agency is responsible for determining the employment status. They will assess whether the sole trader is genuinely self-employed or if they should be classified as an employee for tax purposes.

Conclusion: Does IR35 affect sole traders?

While IR35 doesn’t directly apply to sole traders, understanding employment status is vital for both sole traders and their clients. By making sure your contracts and working practices reflect genuine self-employment, you can minimize the risk of misclassification and protect your business.

If you’re a sole trader and have any doubts about your employment status or IR35, don’t hesitate to seek expert advice. Kingsbridge offers specialised IR35 status reviews and comprehensive business insurance to help you confidently handle the complexities of self-employment.