IR35 is the name commonly given to tax legislation which can apply when a worker provides services to a client through an intermediary, usually their own limited company.
The rules aim to ensure that people who work in a way similar to employees pay broadly the same tax as employees.
Since April 2021, medium and large non-public-sector organisations have been responsible for determining whether the contractors they engage are working inside or outside IR35.
Public sector clients have had the same responsibility since 2017. If a role is inside IR35, the fee-payer must generally deduct Income Tax and employee National Insurance before making the relevant payment to the worker’s company, and account for employer NIC and, where applicable, the Apprenticeship Levy. If it is outside IR35, the contractor can continue to operate through their company and manage their own tax affairs.
In this guide, we explain what IR35 means for clients and recruitment agencies, how responsibility is shared in the supply chain, and the practical steps they need to take under the off-payroll working regime.
Read more here: IR35: the complete guide, and here: What are the Off Payroll rules?
When do the off-payroll rules apply?
The off-payroll working rules apply when:
- A worker provides services through an intermediary, usually a personal service company.
- The client is responsible for deciding the worker’s tax status.
- The client is a medium- or large-sized non-public-sector organisation, or an organisation within the scope of the rules in the public sector.
If the client qualifies as small for the purposes of the off-payroll rules, responsibility for considering IR35 generally stays with the contractor’s intermediary.
Read more in our guide to the small company exemption.
Roles and responsibilities in the supply chain
A typical engagement can involve several parties. Our IR35 Responsibility Checker helps identify which party in the chain is responsible for each step.
The client
The client is the organisation that uses the worker’s services.
When the off-payroll rules apply, the client must:
- Decide whether the engagement is inside or outside IR35.
- Take reasonable care when reaching that decision.
- Issue a Status Determination Statement (SDS) that sets out the conclusion and the reasons for it.
- Pass the SDS to the contractor and to the next organisation in the supply chain, usually the agency.
- Operate a process for dealing with disagreements.
The agency
If an agency sits between the client and the worker’s company, it may also be the fee-payer. Where it is the fee-payer, the agency must:
- Ensure it receives the SDS passed down the supply chain.
- Apply PAYE and National Insurance if the engagement is inside IR35.
- Pay employer NIC and, where relevant, the Apprenticeship Levy.
- Keep records of payments, SDS documents and any material updates to working arrangements.
Read more here: Status Determination Statements.
The fee payer
The fee payer is the organisation that pays the contractor’s company. In many cases, this will be the agency.
If the contract is inside IR35, the fee payer becomes responsible for deducting Income Tax and employee NIC and for paying employer NIC to HMRC.
Assessing status and taking reasonable care
Status depends on the contractual relationship that would exist if the worker were engaged directly by the client. The relevant contractual terms must first be established using ordinary principles of contractual interpretation before the employment status tests are applied.
The client must consider factors such as:
- How much control does the client have over the work?
- Whether the contractor can send a substitute.
- Whether there is a mutual obligation to offer and accept work.
- The degree of financial risk and independence.
- Whether the contractor is part of the client’s organisation.
Our recent case law summaries, including Ready Mixed Concrete and Hall v Lorimer, explain how tribunals analyse these factors in practice.
Taking reasonable care means having a transparent and appropriately informed process in place, considering the relevant contractual terms and circumstances of the engagement, and recording the reasons for the determination.
You must also reconsider assessments if contractors’ contractual terms or working arrangements change materially.
What clients and agencies must do in practice
A compliant and efficient process should include:
- An initial review of the role, contractual terms and relevant working arrangements.
- A documented status assessment.
- Issuing and storing the SDS.
- Ensuring the SDS is correctly passed through the supply chain.
- Applying PAYE and NIC where required.
- Reassessing status if duties, contractual terms or working arrangements change materially.
- Keeping clear records in case HMRC reviews the engagement later.
What happens if IR35 is applied incorrectly?
If a client does not take reasonable care, or if a fee-payer does not operate PAYE when required, HMRC can seek unpaid tax, National Insurance, interest and, where applicable, penalties from the party that bears responsibility under the Chapter 10 liability rules.
Errors often arise from:
- Blanket assessments.
- Out-of-date determinations.
- Status assessments based on inaccurate or incomplete information about the contractual terms and engagement.
- Failing to operate PAYE when the SDS indicates inside IR35.
- Poor record keeping.
If you need support
If you are a client or recruiter and need support with off-payroll compliance, we can introduce you to established IR35 advisory firms.
Our team has been covering IR35 since 1999 and works closely with several of the UK’s leading specialists.
Email us at info@ir35update.co.uk, and we will respond within 24 hours (Mon to Fri).