What is IR35?

Working self-employed through an intermediary or Personal Service Company (PSC), such as a limited company or limited liability partnership, and taking income through a combination of salary and dividends, allows contractors to pay lower rates of National Insurance Contributions (NICs) and income tax compared to regular employees.

However, HMRC deemed that too many individuals were taking advantage of this tax loophole and avoiding paying the correct amount of tax and NICs. HMRC believed that many of these individuals would have been employees if they provided their services directly to the client and, therefore, should be paying the same income tax and NICs as employees.

Therefore, IR35 was introduced in April 2000 to identify contractors who avoided paying the appropriate tax by providing their services through an intermediary and were working as ‘disguised employees’. The legislation also sought to unearth businesses engaging workers on a self-employed basis to ‘disguise’ their actual employment status.

HMRC reformed the off-payroll working rules for the public sector in April 2017. The introduction of the legislation shifted the responsibility for determining the employment status from the individual working through the intermediary to the public sector client engaging them. The off-payroll reform also made the fee-payer responsible for accounting for and paying income tax and NICs to HMRC on behalf of the worker. The fee-payer is the party paying the worker’s intermediary for the worker’s services – usually, the worker’s end client or the recruitment agency.

The off-payroll working rules came into effect for the private sector from April 2021. From this point, all public authorities and medium and large-sized clients in the private sector are responsible for deciding the worker’s employment status and whether the rules apply. Like the public sector, the fee-payer is responsible for accounting for and paying income tax and NICs to HMRC.

Following IR35 changes introduced by HMRC for the private sector in April 2021, responsibility for determining the IR35 status of the contractors they engage lies with the end client. The rules apply to work in the public and private sectors. The end client must provide a Status Determination Statement (SDS) to all parties in the labour chain, explaining the status determination.

The only exception to the off-payroll working rules is if your private sector end client is based entirely overseas, with no UK presence, or if you’re working for a private sector client that meets the criteria for the small business exemption.

Determining whether a contract is inside or outside IR35 is complex. Your IR35 status is determined by several factors, including, but not limited to, control, substitution, and mutuality of obligation. We’ll explain these further:

• Control – What degree of control does your end client have over when, how and where you complete the work laid out in your contract?
• Substitution – Can you, or are you required to, send someone to complete the work in your place?
• Mutuality of obligation – Is your client obliged to offer you work, and are you obliged to accept it?

These three terms alone can be confusing, and attempting to make sense of your contract terms based on IR35 terminology can be tedious and lead to you making an incorrect assumption of your IR35 status. If you or your recruitment agency are unsure, seek the advice of a tax status expert or give us a call on 01707 871622.