Am I exempt from IR35 as a sole trader?

Q: I am a sole trader based in the UK and my only client is based in the US with no presence in the UK. Which party is responsible for establishing whether I am a disguised employee and which party would be responsible for covering the additional tax liability if I was found to be a disguised employee?

A: As a sole trader, you do not need to worry about the IR35 legislation – it only applies to individuals operating through personal service companies. One thing to bear in mind, however, as a sole trader, is your employment status, which as with IR35 is based on your day-to-day working practices.  

A person would normally be seen as being self-employed by HMRC if:

  • They’re in business for themselves, are responsible for the success or failure of their business and can make a loss or a profit
  • They can decide what work they do and when, where or how to do it
  • They can hire someone else to do the work
  • They’re responsible for fixing any unsatisfactory work in their own time
  • Their engager agrees a fixed price for their work, which isn’t dependent on how long the job takes to finish
  • They use their own money to buy business assets, cover running costs, and provide tools and equipment for their work
  • They can work for more than one client

Deciding on the correct employment status is very important, given it impacts how much tax you’re required to pay and the employment rights you receive, if any. 

If, however, you’re a UK taxpayer and work through your limited company with overseas clients, you must consider IR35. 

Under the current legislation for the private sector, you will decide your IR35 status. However, when reform is enforced on 6th April 2020, there remains some uncertainty with regards to working abroad when working directly with a client – the draft legislation doesn’t state which party will be tasked with setting IR35 status, nor does it detail which party will carry the liability. Our advice in this circumstance, as detailed here, is to work off the basis that you will remain responsible, given HMRC has very little influence over companies not based in the UK.

If you work through an agency or third-party that’s based offshore, the liability will rest with the next person in the contractual chain based in the UK, as it currently does in the public sector. 

This answer was provided by IR35 specialist, Qdos Contractor.

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