We’ve previously produced videos and blogs exploring how the new IR35 legislation affects individuals working through a Personal Service Company (PSC), often termed contractors or freelancers, as well as employers who engage them. These resources are available on our website and YouTube channel.
However, we’ve received feedback from sole traders who still feel uncertain about whether IR35 applies to them. This article – and its accompanying video – aims to provide clarity for sole traders on this important issue.
What is a Sole Trader?
A sole trader is someone who owns and runs their business with no separate legal identity from themselves. Put simply, you are the business. The business would not exist without you, and you are personally liable for its debts and obligations.
This raises the question: does IR35 affect sole traders in the same way it does incorporated Personal Service Companies?
Does IR35 Apply to Sole Traders?
The short answer is no. Sole traders are not affected by IR35 because the rules only apply where an intermediary company exists between the client and the individual – for example, a limited company. As a sole trader, there is no such intermediary, so IR35 does not apply.
However, this is also why sole trading is often seen as “riskier” than operating through a limited company. Without limited liability, your personal assets could be at risk if the business incurs debts. By contrast, a limited company provides a layer of protection by separating personal and business assets.
Employment Status Still Matters
Although IR35 does not apply to sole traders, employment status rules still do. These principles, underpinned by employment law, apply to everyone and determine whether you are truly self-employed or should be considered an employee.
The key tests of employment status are:
- Control – To what extent does the client control how, when, and where the work is carried out?
- Substitution – Are you required to provide the service personally, or could someone else with the same skills be substituted?
- Mutuality of Obligation – Is the client obliged to offer work, and are you obliged to accept it?
In most cases, sole traders demonstrate sufficient independence to be considered self-employed rather than direct employees.
Tax Obligations for Sole Traders
As a sole trader, your business income is treated as personal income. You must complete a self-assessment tax return each year, reporting all income and expenses.
Taxes you may be required to pay include:
- Income Tax
- Class 2 and Class 4 National Insurance contributions
- VAT (if registered)
If HMRC determines that you are effectively a full-time employee of your client, then these taxes would instead be deducted at source under the client’s PAYE system.
Conclusion
To summarise:
- Sole traders are not governed by IR35 legislation, as it only applies to incorporated companies.
- Employment law still applies, meaning you must demonstrate that you are genuinely self-employed.
- Sole traders must complete a self-assessment tax return and pay the appropriate taxes each year.
Sole traders do not need to worry about IR35, but they should have a solid understanding of employment legislation and remain compliant with tax reporting obligations.
Find more articles like this at Metroun.
