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

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.

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 (i.e. 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'). 

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 (i.e. the PSC's) responsibility to determine the consultant's employment status for each contract.

Public authorities and medium and large-sized clients

From 6 April 2021, all public authorities and medium and large-sized clients will be 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

If the client has an annual turnover of more than £10.2 million and is not:

the rules must apply.

Small-sized clients

Where the client is a small business (i.e. 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, such as the PSC.

Group company clients

Even if the UK arm of the client business is ‘small’ according to 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 who 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 (i.e. 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, i.e. whether John is a genuinely self-employed consultant or a deemed employee.

  • If A Limited determines that John is a deemed employee (i.e. 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.

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 the following factors: 

  1. whether there is 'mutuality of obligation', i.e. 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', i.e. 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.

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.

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. 

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 (i.e. an agency).

Structure of a 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. 

Preliminary information

For every SDS produced, it is useful to include the following information:

  • The name of the client.

  • The start and end date of the engagement.

  • The name of the contracting agency (if applicable). 

  • The date the SDS was completed. 

  • The name of the person responsible for carrying out the status determination.


The SDS should give a conclusion on the consultant's employment status. If, after having undertaken its assessment, the client concludes that the engagement falls inside IR35 (i.e. the consultant is actually employed for tax purposes), it should state by way of conclusion: 

"We believe that this engagement falls inside IR35 and you are therefore employed for tax purposes, for the following reasons:"

If, however, the client concludes that the engagement falls outside IR35 (i.e. the consultant is genuinely self-employed for tax purposes), it should state by way of conclusion:

"We believe that this engagement falls outside IR35 and you are therefore self-employed for tax purposes, for the following reasons:"


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

Inside IR35

If the engagement falls inside IR35, the client may cite any of the following as reasons:

  • The consultant has entered into a contract to provide their services personally.

  • The consultant works for the client exclusively.

  • The consultant works for the client regularly (which is indicative of a single and continuing contract of employment).

  • The client exercises a degree of control over the services to be provided, as well as how, when and where the consultant does the work. 

  • There is mutuality of obligation. That is, the client makes sure the consultant has a continuous supply of work and expects them to carry out the work when the client requires. 

  • The client provides the consultant with equipment, office facilities, manuals and training.

  • The consultant is entitled to employee benefits.

  • The consultant is subject to performance reviews.

  • The consultant's contract stipulates that they could be subject to disciplinary action.

  • The consultant's contract stipulates that they are not able to provide their services to other clients.

  • The consultant attends company-wide meetings.

  • The consultant works under a contract of service rather than a contract for services.

Outside IR35

If the engagement falls outside IR35, the client may cite any of the following as reasons:

  • The consultant has 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's business would pay any substitute provided.

  • The consultant's business can engage helpers to assist in the provision of services.

  • The consultant is not subject to ongoing monitoring or supervision by the client.

  • The consultant is able to determine how to provide the services which demonstrates that, as an independent specialist, they are able to determine their own method of working.

  • The client does not have any employees who can undertake the services the consultant's business has been engaged to provide, which demonstrates that their business has been engaged for the specialist services it can provide.

  • The consultant pays for training and equipment which is vital to the services they provide. This demonstrates that they operate as a genuine business.

  • The consultant would correct defective work at their own cost and in their own time which shows that they are taking financial risk.

  • The consultant has corrected faulty work in their own time, and at their own cost, during this contract which demonstrates the existence of financial risk.

  • The consultant holds business insurance, which is a good indicator of being in business on their own account and also demonstrates that they are exposed to financial risk.

  • The consultant's business has undertaken multiple contracts. Consultants who are not reliant on one source of income, but who provide services to many clients are more indicative of a genuine business.

  • The consultant works under a contract for services rather than a contract of service.

Final details

The client must include an email address that the consultant can contact if they disagree with the result of the determination. They may also include details about the resources used to arrive at the conclusion they did, eg HMRC's CEST service or specialist legal advice.

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.


If a consultant provides services to a UK client, but isn't a UK resident (i.e. 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 (i.e. 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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