Understanding IR35: Off-Payroll Working in the UK

IR35 rules apply to people working off-payroll. If they provide services for a client through an intermediary but would be considered an employee if there wasn’t for that intermediary; it means that if they’re inside IR35 - the legislation applies to them.

In this case, “the client” refers to the company receiving the services from the independent contractor, who can be operating as an individual, partner, or a personal service company. The client may also be called the hirer, engager, or end client.

How do you know your IR35 status? Well, once a year, all intermediaries need to fill in the P35 declaration, on which they need to state whether they’re inside IR35. That means the government leaves it up to the parties involved to figure out their own tax liabilities.

According to the information from the official government website, employers typically hire an expert to determine whether they’re inside IR35.

It’s also worth mentioning that the government can run a background check and review working practices and contracts - up to six years retroactively. That’s why such tax avoidance is a great financial risk. If the authorities discover you tried to cheat the system, you may suffer financial and legal consequences.

Being "outside IR35"

Simply put, it means the IR35 rules don’t apply to you. If you’re operating as a business, you may have several clients (not all your income is coming from a single client), you have your own equipment, website, etc.

In this case, you’re not paying National Insurance and Contributions for any income you withdraw after you receive your salary because it’s considered as dividends. You only need to pay profit taxes at the corporate rate, which is 20%.

If you determine the IR35 rules apply to you, you will need to pay several types of taxes: income tax and national insurance contributions. These can reduce your income greatly, or increase your costs- if you’re the one hiring a contractor.

The rules may affect you if:

• You are an end client - a business receiving services from an independent contractor who’s a disguised employee. You receive these services through the contractor’s intermediary
• You are an independent contractor, a freelancer, or you have your own company, and you provide services through an intermediary
• You own an agency and you provide your workers’ services through an intermediary

If you fall into the group that needs to determine on their own if they’re inside IR35, try answering the following questions to get a better sense of your employment status - you'll want to check your contract for specifics:

Control

• Does your client or someone hired by them supervise your work or provide instructions on how you should perform the work?
• Does your client supply you with the necessary equipment to perform the work? (for example, IT contractors should have their own computers, software, etc.)
• Does your client set working rules (such as working hours, days, or location)?
• Are you paid on a time basis?
• Are you required to complete additional tasks, not defined by the contract?
• Do you receive sick pay, have paid annual leaves, or other employment rights or benefits?
• Do you only provide long-term services to a single client instead of working project-by-project with multiple ones?
• Do you market your company on your own account? (you have an office, a website, etc.)

Mutuality of obligation (MOO)

• Are you in obligation to accept any work your client offers you?
• Does your client take the whole financial risk?

Substitution

• Can you delegate work to someone else?
• Can you hire employees?

If your answer was “yes” to most of these questions, the government doesn’t consider your situation as self-employment. You’re likely inside IR35 since you’d be considered an employee if you didn’t have an intermediary or operated through your PSC (your own personal service company).

You also need to ensure that all the clauses in your contract align with your actual working practices to avoid penalties and issues. If this checklist still leaves you in doubt about your employment status, here’s an online tool that can help. The HMRC enabled employees, contractors, and employers to use CEST - Check Employment Status for Tax and easily determine whether they fall into the IR35 category.

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Public vs. private sector

As of April 2021, IR35 rules apply to both the public and private sector. Workers that provide services to large or medium-sized clients in the private sector now need to determine if they’re inside IR35.

Before the April change, only clients from the public sector needed to determine the contractor’s real employment status. In the private sector, the independent contractor was the one in charge.

Contractors also have the right to learn the reason behind the client’s decision. This explanation can be found in the Status Determination Statement, and the contractor can open a dispute to reevaluate the decision if they don’t agree with it.

Small businesses

On the other hand, if an individual provides services for a small business from the private sector, the contractor is in charge of determining whether or not the IR35 rules apply to that particular case - this instance hasn’t been changed with the new policy.

Apprenticeship Levy

The end client also has the obligation of making corresponding deductions on the contractor’s payment in case they’re inside IR35. For the fee-payer, those are NICs, income tax, and the Apprenticeship Levy.

Apprenticeship Levy is a tax paid at a rate of 0.5% of your annual bill, and you’re subject to it if this bill is over £3 million or you’re connected to any charities and companies with the purpose of receiving the Employment Allowance reduction.

Does IR35 apply to sole traders?

No, IR35 legislation doesn’t apply to sole traders. However, they can use the same set of questions to determine their employment status and determine if they’re a disguised employee in any case.

If you’re a contractor and you have your own limited company, but according to the IR35 rules, you’re actually an employee, your hirer (end client) will need to cover the tax due.

You will not be responsible for paying the penalties, but you will receive a reduced payment since your NIC taxes will be deducted from the total sum you’ve agreed with the end client. It’s called deemed payment and it accounts for the income taxes and NICs you’d have paid as an employee.

Does IR35 apply to small companies?

Yes, IR35 applies to small companies. A small business meets the following criteria:

• You have 50 or fewer employees
• Your annual turnover isn’t higher than £10.2 million
• Your balance sheet total isn’t higher than £5.1 million

Does IR35 apply to self-employed?

If an individual works via an umbrella company that connects contractors and end clients, IR35 rules don’t affect them. They get paid via the PAYE system and have a contract with the limited company that acts as the intermediary.

However, if they own a limited company and use it as an intermediary to provide services to an end client, IR35 applies to them.

The latest guidelines regarding IR35 went into effect on April 6th, 2021.

As of September 2022, the UK government intends to repeal IR35 altogether in 2023. The move is intended to simplify the tax system.

To avoid legal trouble, additional paperwork, and financial penalties, it’s important to stay in the know when it comes to changes in regulations regarding employment.

This article has provided a comprehensive guide on how to find out if you’re inside IR35, how this legislation has changed with the newest reform, and who it affects from now on.

Now you can move on to do business legally and work with contractors or clients for your mutual benefit.‍

Disclaimer: This is article is informational and should not serve as legal or tax advice. Always check official sources or consult a legal or tax expert.