Sole Trader and IR35

[JamesC34]

Probably a simple question I should already know - But is it correct that only a Limited company can be outside IR35, and a Sole Trader cannot be outside IR35?

[eek]

Probably a simple question I should already know - But is it correct that only a Limited company can be outside IR35, and a Sole Trader cannot be outside IR35?

In so many ways nope.

1) Agencies cannot use sole traders - anyone working through an agency needs to either be on payroll or have a separate entity between themselves and the agency (either an umbrella company or a limited company).

2) An end client can in theory employ someone who is a sole trader - for instance someone developing a website or something else that isn't part and parcel of the clients day to day business. What you can't do (but I see desperate companies continually trying to do#) is to pretend that someone who should be an employee is actually self employed.

And it is the second part that is important if you are a sole trader - if you are part of the business you should be an employee, if you are temporarily providing services that are clearly not directly connected to the day to day trade of the business you can be a sole trader and if you were a sole trader you could pay tax as if you were self employed (i.e. outside IR35).

[Paralytic]

Probably a simple question I should already know - But is it correct that only a Limited company can be outside IR35, and a Sole Trader cannot be outside IR35?

A sole trader cannot really be inside or outside IR35.

EDIT: eek explained it better

[JamesC34]

In so many ways nope.

1) Agencies cannot use sole traders - anyone working through an agency needs to either be on payroll or have a separate entity between themselves and the agency (either an umbrella company or a limited company).

2) An end client can in theory employ someone who is a sole trader - for instance someone developing a website or something else that isn't part and parcel of the clients day to day business. What you can't do (but I see desperate companies continually trying to do#) is to pretend that someone who should be an employee is actually self employed.

And it is the second part that is important if you are a sole trader - if you are part of the business you should be an employee, if you are temporarily providing services that are clearly not directly connected to the day to day trade of the business you can be a sole trader and if you were a sole trader you could pay tax as if you were self employed (i.e. outside IR35).

OK Thanks that is helpful.

So to sum up my understanding, if I got the role through an Agent the option of being a 'sole trader' has effectively been closed to me. But if the end client had approached me directly, I could have still been a sole trader. is that correct?

[Patrick@Intouch]

OK Thanks that is helpful.

So to sum up my understanding, if I got the role through an Agent the option of being a 'sole trader' has effectively been closed to me. But if the end client had approached me directly, I could have still been a sole trader. is that correct?

There is no intermediary involved where someone trades as a sole trader, hence why the Intermediaries Legislation (IR35) doesn't apply.

What does apply is employment law and HMRC can and have challenged the status of self employed people where they think the relationship is more like a relationship of employment. The risk of these relationships being classified incorrectly sits with the employer and that's why a lot of end clients and agencies avoid contracting directly with sole traders.

[TheCyclingProgrammer]

Nothing wrong with engaging with a client directly as a sole trader - lots of freelancers who don't work through agencies do this, even though it isn't necessarily the most tax efficient set up. Its main advantage is that IR35 is irrelevant, as others have said.

There is the risk of misclassification - if you are treated like an employee but you're operating as self-employed - but generally speaking the risk is on the engager if HMRC find you should have been employed (because it is the employer who is avoiding paying employer NIC and other responsibilities as an employer, rather than the worker).

[jamesbrown]

IR35 applies to all types of intermediaries, not just limited companies, but there’s no intermediary if you’re a sole trader.

[jantill]

Limited Co Gives Limited Liability

Do not let the tax tail wag the liability dog.
As a sole trader you can be sued for pretty much everything you have.
A Limited Company can normally only be sued for its worth.

[Lance]

Do not let the tax tail wag the liability dog.
As a sole trader you can be sued for pretty much everything you have.
A Limited Company can normally only be sued for its worth.

Whilst true it’s not as clear cut.

The point of limiting your liability is when you’re borrowing money to fund the business. It allows for heavily leveraged businesses to function with debt far in advance of what the owners would like as a personal liability.

Getting sued by anyone other than a genuine creditor is highly unlikely as LTD or sole trader. And PI/PL insurance is cheap enough to cover those scenarios.

So being a LTD is almost always just about the tax benefit. And agencies not working with anything else.