If you run your business as a sole trader, IR35 does not apply to your work. Here, we explain why this is the case and why self-employed people should still be aware of the Agency Legislation and other rules.
What is a sole trader?
The most popular business structure in the UK is the sole tradership, which comprised 56% of all UK businesses in 2023. This equates to around 3.1 million people.
It is simple to become a sole trader. From a tax point of view, you (the individual) and your business are treated as a single entity. You pay income tax and NICs annually via self-assessment.
However, unlike trading via a limited company, your liability is not unlimited if things go wrong as a self-employed person.
Despite the ease with which you can set up as a sole trader, there are some fundamental reasons why professional contractors rarely trade this way.
Contractors rarely work as sole traders
Most contractors work via an intermediary – typically a limited company or an umbrella.
There are two main reasons why this is the case:
The Income Tax (Earnings and Pensions) Act 2003 does not allow self-employment when a recruitment agency is involved in the relationship between supplier and client.
Also, if you are hired as a sole trader and subsequently found to be an ’employee’ for tax purposes, you could claim employment rights from your recruiter.
The recruiter could also become liable for additional tax and NICs.
From the contractor’s point of view, there are also several compelling reasons why a limited company is a more appropriate business structure to trade under, compared to self-employment:
- Your liability is limited should things go wrong.
- The ‘limited’ status portrays a professional image.
- There are some tax benefits for trading via a limited company (although much reduced in recent years).
Sole traders and IR35 – no intermediary
If contractors rarely work as sole traders for the above reasons, then is IR35 even a consideration?
The answer to this lies in the fundamental basis of IR35, a.k.a. The Intermediaries Legislation.
The rules were created in 2000 to clamp down on workers’ use of intermediaries (limited companies). Were it not for the existence of the intermediary, some workers would be considered ’employees’—subject to standard employment taxes.
So, IR35 does not apply to an engagement if the worker is not working via an intermediary (a limited company).
However, employment status is not merely a consideration for limited company workers.
Sole traders and disguised employment
Just as IR35 tackles so-called disguised employment by limited company contractors, agency legislation exists to tackle disguised employment by sole traders.
In recent years, some employers have preferred to hire ‘self-employed’ workers rather than employees to save money and protect themselves from assuming employer-type obligations.
As a result, the Government drafted Agency Legislation (a.k.a. Section 44) to tackle this practice (see ESM2029).
If you are deemed to be working under a client’s supervision, direction or control (SDC), then you are deemed to be an employee for tax purposes.
You can learn more about the agency legislation – as clarified in 2016 – here.
Sole trading and IR35 – in conclusion
Becoming a sole trader does not circumvent the IR35 rules, as the legislation only applies to intermediaries.
As we have discussed, if recruiters routinely hired sole traders, separate employment status rules would still apply anyway.
Put simply, if you are not truly working in business on your own account, you will likely be treated as an employee for tax purposes, regardless of the business structure you trade under.
The key is to trade outside IR35 legitimately as a limited company worker, as demonstrated by the terms of your contracts and how you carry out this work (your working practices).
Read our core IR35 guides to get started!
