What is IR35? 

IR35 is a tax law created to prevent avoidance, ensuring individuals in ‘disguised employment’ pay taxes at a similar rate to regular employees. The focus is on contractors seen as ‘deemed employees’ by HMRC, rather than legitimate contractors.


What are the IR35 off-payroll working rules and do they apply to me?

IR35, also called ‘intermediaries’ legislation,’ is anti-avoidance tax law crafted to tax disguised employment similarly to regular employment. It addresses individuals using intermediaries, like personal service companies, to exploit tax benefits while working on a self-employed basis. If the work’s nature aligns with that of an employee after removing the limited company, the person is considered a ‘disguised employee’ and falls under IR35.

This legislation, aimed at curbing tax avoidance, was established in 1999 and implemented in 2000 as part of the Finance Act. Its goal is to prevent individuals from portraying themselves as self-employed over the weekend to evade tax responsibilities.

The Treasury asserts that non-compliance with IR35 has led to a significant loss in tax revenue. Consequently, there have been recent reforms in the legal regulations governing IR35 in the public sector. Starting from April 2021, when a PSC contractor undertakes a private sector contract with a medium-to-large business, the responsibility for determining IR35 status shifts to the private sector body, not the contractor. This measure has faced criticism due to the complexity of determining IR35 status and the challenges in enforcement. Initially scheduled for April 2020, the measure was postponed to April 2021 following the COVID-19 pandemic.

As a result of this alteration, contractors directly affected may modify their operating methods to maximise take-home pay.


How does IR35 legislation affect me?

Being caught by IR35 carries the financial burden of paying Income Tax and National Insurance Contributions (NIC). This legislative measure has sparked controversy, as it imposes a tax treatment similar to employees but without the accompanying employment rights and benefits. If you fall within IR35, your take-home pay could significantly decrease compared to being outside IR35.

For the hiring body, taking on a contractor outside IR35 means you won’t cover Employers’ NIC on their behalf, and you’re not legally obligated to provide employment benefits or rights, such as sick pay, holiday pay, or maternity pay. If the contractor falls within IR35, you’ll need to pay Employers’ NIC, but you won’t be legally required to provide employment rights.


How is IR35 status determined?

IR35 status is usually determined by three main factors: control, mutuality of obligation, and the right to substitution.

(I)Control: Employees are typically directed and supervised by their employers, while contractors should have the freedom to decide how tasks are carried out and the manner of their performance.

(II)Mutuality of obligation: This refers to the expectations at the end of the contract. Employees usually have a continuous workload, whereas contractors are only obligated to complete the contracted task. If a contractor is expected to continue work after the contract ends, similar to an employee, it aligns with traditional employment.

(III)Right to substitution: Contractors must have the right to provide a substitute worker if they are unavailable. They should be able to choose and train a suitable substitute, and the client should reasonably accept the replacement. Including the right to substitution in a contract can reduce the risk of penalties during an IR35 investigation.

When there’s a contract between the client and agency, and agency and contractor, these factors—Control, Mutuality of Obligation, and Right to Substitution—should be inherent in both contracts.

In addition to the mentioned factors, HMRC will also consider the following:

  • Own accord: Contractors should willingly carry out the contract based on their own decision.
  • Equipment: Contractors have the option to use their own equipment and are not obligated to use the client’s equipment.
  • Employer/Employee relationship: Contractors should not become overly dependent on the employer, avoiding becoming an integral part of the organisation by participating in staff social events and team meetings, behaviours typically associated with employees.
  • Exclusivity: Contractors usually work for more than one client simultaneously, ensuring their services are not exclusive.

During an IR35 investigation, HMRC will assess these factors to ascertain that you are not acting as a disguised employee, aiming to minimise your tax liabilities.

Read More:

What is the IR35 CEST employment tool?

HMRC introduced the ‘check for employment status’ (CEST) tool to determine whether you are employed or self-employed, indicating whether you fall inside or outside IR35. The decision relies on the nature of each contract and associated responsibilities. If these aspects change, a review of your employment status becomes necessary. Since the IR35 reform in the public sector, employers are mandated to use either the CEST tool or an independent IR35 tool to ascertain the IR35 liability of contractors.

It’s crucial to note that the rules for IR35 in the public sector and IR35 in the private sector differ following recent changes by HMRC. The alterations in IR35 rules can impact how contractors operate, whether through a limited company or umbrella company. Consequently, an alternative structure may result in better take-home pay after the enforcement of the private sector reform in 2021.

If you’re considering closing your limited company due to changes in IR35 legislation, we recommend exploring a cost-efficient option like a Members’ Voluntary Liquidation (MVL). Contact one of our licensed insolvency practitioners at an office near you if your limited company will be affected by the IR35 private sector reform in 2021.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.