you've probably heard people talking about

IR35 legislation.

They've probably spoken about it in hushed tones, like it's this big scary thing to be feared .

It's a piece of legislation that you need to know about

but it's not actually as complicated as a lot of people think it is.

The crux of IR35 is the difference in the way full-time employees are taxed

and the way limited company directors are taxed.

If you're a full-time employee, the way you are taxed is quite rigid

and it's handled by your employer.

If you're the director of a limited company, you have more flexibility

in the way you extract profits out of your company.

So to give you an idea of why this important to HMRC,

an employee earning £120,000 a year will pay about £5,000 more tax to HMRC

than a limited company contractor.

The IR35 rules were put in place to stop people leaving work as an employee on Friday,

and then turning up on Monday and saying "I'm a limited company contractor now!"

and potentially paying a lot less tax revenue to HMRC.

HMRC view this as tax avoidance.

So the overall aim of IR35 is to determine whether you are legitimately self-employed,

whether you're an independent contractor, or whether you're what's known as a 'disguised employee'.

So, whether you should be on the payroll of the company you're working for.

You'll also find that there's a lot of jargon around IR35

If you are caught by the rules you can be referred to as 'inside IR35'.

If you are not caught by the rules, you are 'outside IR35'.

If HMRC decides that you are inside IR35, they can launch an investigation into your business

which can run on for many years and be very costly, and could result in you paying back

all the tax that you would have paid if you were a full-time employee.

An important concept to get your head around when trying to work out your IR35 status

is something called a hypothetical contract.

This is trying to determine whether the contract should be between your client and your limited company

or your client and you as an employee.

Here to explain a little more about hypothetical contracts is our Senior Accountant, Chris.

There will be a contract between the limited company and the client.

However, IR35 looks at the hypothetical contract that would be in place between

the worker and the client.

This hypothetical contract is very important for IR35.

This is because if it is one of an employee relationship, you are inside of IR35.

A few of the key points that we'll look around this contract, is both the working practices

and the contractual terms between the limited company and the client.

Additionally with this type of structure there could also be an agent in place.

However, IR35 always looks at the hypothetical contract between the worker and the client.

So, hopefully that clears up a bit of the confusion around IR35,

it's a very complicated subject.

There are some other factors you can think about that could influence your status

such as when you have to complete the work personally,

whether you can leave the contract at any time,

and whether you have control over how the work is completed.

We're going to go into those factors in a little bit more detail in further videos.

In the meantime if you have any questions about IR35, leave them down here in the comments

and we will do our very best to answer them.