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What is IR35?

IR35 is a tax law introduced to tackle tax avoidance by workers (sometimes known as 'consultants' or 'contractors') supplying their services to clients via an 'intermediary' who would otherwise be an employee.

When does IR35 apply?

IR35 applies when a consultant provides services to a company through an 'intermediary' but would be classed as an employee if contracted directly.

What is an intermediary?

An intermediary is a party who makes arrangements for or pays an individual to work for a third party (known as a 'client' or 'end-client'). Consultants tend to provide their services through a limited company intermediary, known as a personal service company (or 'PSC'). A PSC is a type of intermediary where the consultant has a 'material interest' in the company, meaning they are either the director of the PSC or able to control more than 5% of the ordinary share capital. 

Where the consultant does not provide their services through a PSC (ie they provide their services to the client directly as a sole trader), the client is still responsible for determining their employment status (see 'What do clients need to do?'). This is because if a consultant is deemed an employee, the client may be held liable to HMRC for the misclassification.

What happens when IR35 applies?

Where IR35 applies, the fees paid by the client to the consultant are treated as employment income and subject to income tax and National Insurance Contributions ('NICs'). 

Who does IR35 apply to?

Public sector

IR35 applies to public authorities such as:

  • government departments, including their executive agencies

  • companies owned or controlled by the public sector

  • schools or universities

  • local authorities

  • parts of the National Health Service

Currently, if a client is in the public sector, it is their responsibility to determine the consultant's employment status.

Private sector

The private sector includes third sector organisations, such as some charities.

When a private sector business contracts with a PSC, it does not have to deduct tax under the Pay As You Earn (PAYE) system, nor does it have to pay the employer's NICs from payments made to the PSC. 

Currently, if a client is in the private sector, it is the intermediary's (ie the PSC's) responsibility to determine the consultant's employment status for each contract.

What are the changes from 6 April 2021?

Public authorities and medium and large-sized clients

Since 6 April 2021, all public authorities and medium and large-sized clients are responsible for deciding the employment status of consultants. The rules apply to all public sector clients and private sector companies that meet two or more of the following conditions:

  • they have an annual turnover of more than £10.2 million

  • they have a balance sheet total of more than £5.1 million

  • they have more than 50 employees

The rules must apply if the client has an annual turnover of more than £10.2 million and is not:

Small-sized clients

Where the client is a small business (ie a business with a turnover of £10.2 million or less, a balance sheet total of £5.1 million or less and/or 50 employees or less), the responsibility for assessing the arrangements, and applying IR35, will remain with the intermediary (eg the PSC).

Group company clients

Even if the UK arm of the client business is ‘small’ according to the criteria above, IR35 will still apply if the subsidiary is part of a bigger group; even if that bigger group is based overseas (for example, the client is a subsidiary of a larger business). This means the rules have to be applied to the group as a whole, rather than a single individual company. 

 For there to be a 'group company' for the purposes of IR35, there must be a parent and a subsidiary. A company is a 'subsidiary' if more than 50% of its voting shares are held by the parent company.


Employment or recruitment agencies that supply consultants to a client may also be affected by the IR35 rules if they supply consultants to:

  • a public sector client

  • medium and large-sized private sector clients, or

  • another agency that supplies a consultant for public sector clients or medium and large-sized private sector clients

Agencies could become liable for paying tax and NICs if any of the following apply:

  • they are the fee payer

  • they aren't the fee payer but do not pass on the client's determination to the person/organisation they contract with, or

  • they are the first agency in the labour supply chain 

What is a 'fee payer'?

Some agencies are also 'fee payers'. A fee payer is the organisation or person who pays the consultant's intermediary (ie their PSC). If an agency is a fee payer, they'll be responsible for deducting tax and NICs and paying them to HMRC. By way of example:

  • John supplies IT services to A Limited through his PSC and via an agency.

  • A Limited is the client and makes payment to the agency. 

  • As the client, A Limited is responsible for assessing whether the IR35 rules apply and determining John's employment status, ie whether John is a genuinely self-employed consultant or a deemed employee.

  • If A Limited determines that John is a deemed employee (ie John falls inside IR35), it will fall on the fee payer to make the necessary tax and NIC deductions.

  • It is the agency that pays the PSC for the work undertaken by John, so the agency is the fee payer in this instance.

Complex labour supply chains 

What happens if there is more than one agency between the PSC and the client in the labour supply chain? The IR35 legislation says that the last party in the chain (above the PSC) to receive the client's status determination is the party who will be deemed the fee payer. However, liability for accounting for tax and NICs will lie with the client if HMRC cannot recover tax and NICs from the fee payer (or the contracting agency). For further advice on this complex area, Ask a Lawyer.

What do clients need to do?

1. Determine the consultant's employment status

Clients will need to determine the employment status of a consultant every time they agree to a contract with a consultant or agency. In determining the status of the consultant, the client will need to consider several factors, including: 

  1. whether there is 'mutuality of obligation', ie an obligation on the client to provide work to the consultant, as well as an obligation on the consultants to accept work. If the client is obliged to offer paid work and the consultant is obliged to accept it, this is an example of a contract for services and therefore an employment relationship that falls within the scope of the IR35 regime. 

  2. the degree of control exerted over the consultant. If the client controls how, when and where the consultant completes the work, an employment relationship could be inferred.

  3. whether there is a 'right of substitution', ie whether the client will only accept the consultant as the performer of the services. If the consultant cannot send a substitute to perform the services, an employment relationship could be inferred.

For more information, read IR35 status determination.

HMRC's CEST (Check Employment Status for Tax) service can help clients establish whether consultants on specific engagements should be classed employed or self-employed for tax purposes. Clients must take reasonable care when determining the status of consultants. If the client fails to take reasonable care, the responsibility for the deduction of tax and NICs, and paying these to HMRC will rest with it.

2. Keep records

Clients will need to keep records of their employment status determinations, including the reasons for the determination and fees paid. They'll also need processes in place in the event of any disagreements that arise as a result of the determination. 

3. Communicate the determination

Clients can communicate their determination by using a Status Determination Statement. This statement must be passed to the worker and the person or organisation they contract with (ie an agency).

4. Status Determination Statement

The Status Determination Statement (SDS) must give a conclusion on the consultant's employment status and the client's reasons for coming to that conclusion, as well as setting out the consultant's right to appeal the decision.

The SDS should expressly state whether the engagement falls:

  • inside IR35 (ie the consultant is actually employed for tax purposes), or

  • outside IR35 (ie the consultant is genuinely self-employed for tax purposes)

The SDS should then give the client's reasons for coming to the conclusion. 

Examples of reasons for finding that the engagement falls within IR35 include:

  • the consultant working for the client exclusively

  • the consultant being entitled to employee benefits

  • the consultant being subject to performance reviews

Examples of reasons for finding that the engagement falls outside IR35 include:

  • the consultant having a genuine right to provide a substitute, demonstrating that it is their business that has been engaged to provide services rather than a specific individual

  • the consultant not being subject to ongoing monitoring or supervision by the client

  • the consultant correcting faulty work in their own time and at their own cost

For more information on the different reasons, read IR35 status determination.

For bespoke legal advice on determining a consultant’s status, get IR35 status determination advice

The SDS must also include an email address that the consultant can contact if they disagree with the result of the determination. Where the consultant disagrees with the determination and informs the client of this, the client has 45 days to respond to the consultant's claim. Failure to respond to such a claim within these 45 days results in the client becoming liable for the consultant’s tax and NICs.

5. Deduct and pay tax 

If the client determines that the IR35 rules apply, they'll need to deduct and pay tax and NICs to HMRC.

What if the parties are overseas?


Where a client is based wholly overseas (ie doesn't have a UK connection), the IR35 rules do not apply. Where a client has a connection to the UK, then IR35 may apply.

Clients will have a UK connection if they:

  • are resident in the UK

  • have a permanent establishment in the UK (ie a fixed place of business such as a branch, office or factory, or

  • have an agent acting on their behalf in the UK, who exercises their authority to act on behalf of the client.


If a consultant provides services to a UK client but isn't a UK resident (ie they perform all of their duties overseas), then there is no requirement to account for tax and NICs, as IR35 concerns UK tax liability. If, however, the consultant lives overseas but performs 'significant' duties in the UK (the occasional trip to attend a project team meeting would not be considered 'significant'), the IR35 rules would still apply. 


If an agency is responsible for paying the consultant's intermediary (ie their PSC) and that agency is based overseas, liability for paying tax and NICs (in the event that the consultant is deemed an employee) will move to the next person above them in the contractual chain which is in the UK - usually the client. 

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