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The Deazy Solution

IR35 Software Developers & What You Need To Know

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Say hello to the UK's new tax legislation

In a year of unprecedented change, the UK's new tax legislation, IR35 is causing complex challenges for many companies regardless of size and industry. For tech businesses, this change further exacerbates existing obstacles surrounding developer hiring. Managers now need to consider a new dimension in the already tricky process of vetting devs. This challenge is: finding an IR35 software developer.

Aspects of tax laws can often be complex, full of nuances, and difficult to understand. Unfortunately, IR35 is no different. However, we're here to help! In this blog post we will give you an insight into what this new law means, why they may affect you, and how organizations can safeguard themselves whilst staying agile and future proofed.

If you want to know everything you need to know about IR35 and how it might effect your business, download our eBook now!

What is IR35?

IR35 is another name for off-payroll working rules in the UK, brought into action in April of 2021 (UK GOVT LINK) . The government's ruling on IR35 comes as an attempt to combat tax avoidance by contractors who HMRC considers to be "disguised employees". The legislation applies to medium and large-sized companies who hire these contractors.

What is a disguised employee? The law defines disguised employees as individuals who work like payroll staff, but operate and provide services via their own limited company, also known as a 'personal service company'. This means they pay corporate rather than employee taxes.

There are a few key topics which have to be mentioned when talking about IR35, including how the law changed in recent years, the impacts of IR35 on individuals and organisations, working through an intermediary, the impact of software developers, and potential solutions.

If this all seems a little confusing, don't worry, we run through each of these areas in more detail below!

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Implications for Individuals and Organisations

It is one thing to understand the basics of what IR35 means as an employer, however it is another to truly be able to define if your contractors are 'inside' or 'outside' IR35.

What does 'inside' IR35 mean?

Inside engagements which fall within the guidelines of the UK’s new tax law, defining contractors as an employee of a company, rather than a third party engagement through a limited company. This means you have to pay national insurance contributions on behalf of the contractor.

What does 'outside' IR35 mean?

Agreements with a 3rd party which fall outside of the scope of IR35, and therefore identify a contractor as being separate from the business. ​This puts them outside the realm of your permanent employees.


Here are some simple checklists of help you define if your contractors fall inside or outside.

Inside Indicators

  • You don't allow a substitute to carry out the work.

  • You have control over how, where and when the work is carried out.

  • Your contractor receives the equivalent to employee benefits (e.g. holiday pay or sick pay or expenses)

Outside Indicators

  • Your contractor has complete control over how and when the work is carried out in their own time and how they report to the client.

  • Your contractor is identifiable as their own entity, with their own email signature.

Your contractor is based wholly overseas — and therefore not within the scope of UK tax laws.

If you want to learn about other indicators download our eBook here!

Top tip: It is important to note that none of these indicators alone are deciding factors. Since IR35 is full of grey areas, one factor alone, such as the covering of expenses will not automatically classify 3rd party contractors as permanent employees.

So what happens if your contractor is deemed inside IR35?

Businesses engaging a contractor through personal service companies are legally required to deduct National Insurance and Income Tax if they deem the engagement to be “inside IR35”. The government has said it will take a “light-touch approach” for accidental errors caught in the first year. But after that, anyone who fail to fall in line and is caught faces penalties to the tune of unforeseen tax repayments, late-payment interest and quite possibly a hefty fine.

Changes In Recent Years

Off-payroll tax laws have been around since 2000 when Gordon Brown, the then Chancellor of the Exchequer, introduced measures to crack down on off-payroll working in the UK.

Originally the onus was on the contractor to define their IR35 status, but after several years, in April 2020, this responsibility shifted to the employer. Now, it’s up to medium and large-sized corporations in the private sector, (as well as public sector clients) to determine a worker's employment status for IR35 purposes.

The recent changes come based on the government's knowledge based predictions that disguised employees make up a huge section of the private sector and public sector workforce. They believe only 1/10 contractors are correctly claiming an 'off-payroll employment' status. What's more they think the issue is so widespread that the new ruling will aid the government in collecting over £3bn extra in tax revenue.

Learn more about how the new legislation will affect private sector and public sector contracts.

IR35 - Off-payroll working through an intermediary

Perhaps the most common way to avoid IR35 risk is to find contractors through an intermediary, the most common example of which is an umbrella company. These are agencies that employ self-employed contractors on behalf of clients. In other words, self employed contractors can join an umbrella company as an alternative to setting up their own limited company, and provide their services through an intermediary.

A key benefit of working with intermediaries is the shifting of tax liability onto a 3rd party. However, intermediaries often work in a number of different ways, so it's important to examine the details of how each particular agreement works.

Top tip: if you are planning to use an intermediary to hire a contractor, we suggest seeking professional advice.

The Impact on Software Developers

As IR35 applies to all industries including software development, a company trying to delivery they digital road map in an agile digital roadmap face new hurdles. Software development is a particularly tricky industry, as the search for developers is already difficult.

In the US alone, the Bureau of Labor Statistics indicates that by 2026, the shortage of engineers will exceed 1.2 million.

In today's world, business success often relies on a company’s ability to stay agile, and pivot in unforeseen circumstances. Since being able to pivot is crucial to delivering ambitious and flexible tech innovation roadmaps, many firms have spent the past few years relying on software developers hired on short term contracts. However, due to IR35, this is no longer possible.

The software development industry is also particularly affected by IR35 due to the nature of tasks developers take on. Companies will often want to gain specific tech expertise with trusted freelancers for a series of tasks, such as building an application or updating their website. This makes flexing teams up and down common practice.

Unfortunately IR35 makes this challenging for medium and large companies. This means many businesses are choosing to create full time jobs for developers, even when they may only have part time work available for them. Alternatively companies may choose to delay their innovation roadmaps, which could lead to them losing their edge and agility.

Another key challenge which makes IR35 particularly tricky when it comes to software developers, is the high salary demands. Due to an increased shortage of developers, salary demands are even increasing. This makes a firm’s decision to hire full time developers even more difficult.

Want to learn more about how software development is impacted by IR35? Read our eBook!

IR35 Software Developers

Don't worry, finding a flexible IT contractor for your project doesn't have to be as difficult as it might seem. You can easily find a third party contractor with the right knowledge about tech-stacks to run your project, the Deazy way.

How to be IR35-friendly, the Deazy way? Perhaps the easiest way to ensure you’re IR35-friendly whilst working flexibly is to use resources in teams based outside the UK. That’s where Deazy comes in. You can learn more about how we’re providing a game-changing resourcing model for developing digital solutions and products while helping remove concerns around payroll working in our eBook.

Hiring IR35 software developers through Deazy

Conducting a job search, and hiring IR35 friendly developers through Deazy is as easy as 1,2,3!

  1. Brief our team on your project: Fill out our simple on-site briefing flow and chat through your requirements with a helpful member of the Deazy team.
  2. Estimates and proposals shared via Deazy platform: View your project estimate, screen potential IR35 friendly candidates and find the perfect dev talent via Deazy’s automated platform.
  3. Project kick off!: Get a developer or whole team working on your project in as little as two weeks. Enjoy flexible development, while knowing that your engagements are IR35 friendly. Now all you have to do is sit back, relax and watch Deazy do what we do best - making development easy!

Read more in our e-book

Learn about how Deazy makes it easy to hire flexible, scaleable, stellar and IR35 friendly developers, from the top 0.5% of near shore talent.

Download our eBook now!