How big a threat is IR35 to a Limited Company contractor?

IR35, also known as the "off-payroll working rules," is a set of regulations that determine whether a contractor providing services to a company through a limited company (also known as a personal service company) is considered an employee or a self-employed contractor. The main purpose of IR35 is to ensure that contractors who are effectively employees and receive the same benefits and rights as employees are subject to the same tax obligations as employees.

For limited company contractors, IR35 can be a significant threat because it can result in them being reclassified as employees and subject to additional taxes and National Insurance contributions. This can significantly increase their cost of doing business and make it less attractive for them to continue working as a contractor. Additionally, if a contractor is found to be in violation of IR35, they may be subject to fines and penalties.

It is also important to note that under IR35, the responsibility for determining a contractor's employment status falls on the company that the contractor is providing services to, rather than the contractor themselves. This means that companies may be more cautious about engaging with limited company contractors, and may prefer to work with larger companies that have the resources to ensure compliance with IR35.

However, it's worth noting that IR35 rules are not applicable for contractors who are providing services to small companies. The small company are defined as companies with less than 2 of the following : 50 employees, turnover of £10.2 million or a balance sheet of £5.1 million.

In summary, IR35 can be a significant threat to limited company contractors because it can result in increased taxes and National Insurance contributions, as well as fines and penalties for non-compliance. Additionally, companies may be more cautious about engaging with limited company contractors due to the responsibility for determining employment status falling on the company, rather than the contractor. However, those contractors providing services to small companies are not affected by IR35 rules.