IR35 is a complex regime which affects employers, consultants and personal services companies. Read this Quick Guide to find out how it affects you and the taxes you pay.

The IR35 Regime is a "disguised employment regime" introduced to deal with perceived tax avoidance by consultants and contractors performing their services through a Personal Service Company (PSC) avoiding income tax or NICs.

Also known as the ‘ off-payroll working rules’, these make sure workers pay broadly the same tax and National Insurance contributions as an employee if they:

  • provide services through their own intermediary - most commonly a limited company that they control

  • would have been an employee if they were providing their services directly to the client

IR35 rules apply if the three following conditions are met: 

  1. An individual personally performs services for a client (or is obliged to do so).

  2. Those services are provided under arrangements involving an "intermediary". 

  3. The circumstances are such that if the arrangements had been made directly between the individual and the client, the individual would have been regarded as employed by the client "in employed earner's employment" for NICs purposes. 

Where IR35 does apply, the fees paid by the end-user or client to the consultant would be treated as employment income and subject to income tax and NICs. 

Public sector

Some rules already apply to all public sector clients. These include:

  • 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

Private sector

When a private sector business contracts with a PSC it does not have to deduct tax under the Pay As You Earn System (PAYE) and does not have to pay employer's NICs from payments made to the PSC. Therefore, it is the PSC’s obligation to decide whether or not the contractual relationship in question falls inside or outside IR35.

From 2021, the obligation for determining employment tax status and whether the IR35 rules apply will pass from the PSC to the end-client, for some private sector companies. Where it does apply, the fee-payer will be responsible for deducting income tax and employee NICs, and accounting for those together with employer NICs. If the client gets the analysis wrong, it will be liable for the underpaid tax and associated penalties and interest. 

The fee-payer could either be the client or, where there is an intermediary agency - the agency.

However, this will only apply to medium and large-sized private sector clients. 

For the rules to apply to a private sector company, it should meet 2 or more of the following conditions:

  • it has an annual turnover of more than £10.2 million

  • it has a balance sheet total of more than £5.1 million

  • it has more than 50 employees

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

If a company is exempt the determination will remain the responsibility of the worker’s intermediary.

When assessing IR35 status or employment status, the end-user client will have to complete an employment status determination (ESD) statement and pass this on to the supplier they have a contract with. Any other intermediaries will be obliged to pass this employment status determination statement down the contractual chain until it finally ends up with the PSC, and eventually, it will need to be passed to the individual consultant.

There are a number of potentially relevant factors to which varying importance can be attributed depending upon the exact circumstances to make this determination. Some of them include:

  • Is there a Mutuality of obligation? Is there an obligation on the client to provide work to the consultant? Is there an obligation on the consultants to accept work? If the client is obliged to offer paid work and the consultant is obliged to take it, this is an example of a contract for services and therefore an Employment relationship and falls within the scope of the new IR35 regime. If a contract also states that the consultant can't work for other clients while working for the client, this may also infer employment status as opposed to truly self-employed.

  • Look at the degree of control over the consultant. What kind of control does the client have over the consultants? Does the client have control over the way in which the consultants do the work and when and where they must be performed? 

  • Look at the economic reality of the relationship. Who provides the equipment? Who takes the financial risk? How reliant is the consultant on the client for work and the manner and timing of payment, the duration of engagement and the integration of the consultant into the business?

  • The right of substitution. Will the client only accept the consultant as the performer of services? Can they send a substitution? 

There are many other factors that can be relevant and this determination should not only be based on what the contract between the consultant and the client assumes that this relationship is. 

In the meantime, it is important that consultants review their status, as liability for the incorrect determination still sits with them. Consultants also remain responsible for deciding how to pay themselves and for accounting for their tax.

For more information read Consultants workers and employees

Ask a lawyer if you need help determining your own status if you are a consultant/contractor or your consultants’ IR35 status.