A brief overview

In this IR35 guidance piece for engagers of contractors, we explore what it is and the importance of getting things right.

IR35, also known as the Off-Payroll Working rules, is a piece of UK tax legislation designed to address “disguised employment”. Since the significant reforms in 2017 and 2021, which brought in Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003, the responsibility for determining IR35 status for engagements with public sector bodies and medium and large private sector entities now rests with you, the engager.

As an engager, your role is to determine whether the individual contractor working through an intermediary (such as a limited company) should be classified as “inside” or “outside” IR35. In essence, you need to assess if their working relationship with you resembles employment. If so, they should be taxed as an employee.

Key Responsibilities under Chapter 10

1. IR35 Status Determination: You are responsible for determining the IR35 status of any contractors you engage through intermediaries. This involves evaluating both the written contract and the actual working practices to decide if the relationship with the contractor amounts to employment for tax purposes.
2. Status Determination Statement (SDS): Once you’ve made a determination, you are required to issue a Status Determination Statement (SDS) to the contractor and any other relevant parties in the contractual chain (e.g., agencies). The SDS should clearly state whether the engagement is inside or outside IR35 and explain the reasoning behind your decision. This document must be provided no later than the date of the first payment.
3. Reasonable Care: You must take “reasonable care” when making your determination. HMRC expects you to consider all relevant factors and to be diligent in your decision-making process. Failing to take reasonable care could result in liability for unpaid taxes and penalties if your determination is later challenged.
4. Fee Payer Obligations: If your determination places the contractor “inside” IR35, the fee payer (which could be you or another party, depending on the contractual chain) is responsible for deducting tax and National Insurance contributions (NIC) at source. This is known as making “deemed employment deductions.”
5. Dispute Resolution: Contractors have the right to challenge your IR35 determination if they disagree with it. You must have a process in place to handle disputes and respond within 45 days. If you fail to respond or resolve the issue within this period, you will be liable for the tax obligations, regardless of the initial decision.

You can find further details on responsibilities within HMRC’s online IR35 guidance platforms here.

What is the difference between inside and outside IR35?

• “Inside IR35”: If you determine that the contractor is working in a manner similar to an employee, they are classified as “inside IR35”. This means you or the fee payer must deduct tax and NIC from their payments. Essentially, you treat the contractor for tax purposes as you would an employee.
• “Outside IR35”: If you determine that the contractor is genuinely self-employed, they are classified as “outside IR35”. In this case, payments are made gross, and the contractor remains responsible for their own tax affairs.

How is IR35 status decided?

In determining status, it is crucial to assess both the contractual agreement and, more significantly, the actual working practices apparent in the daily interactions between the individual worker and the client. How status is established is rooted in decades of IR35 and employment status case law.

Here is a high-level look at some of the main factors that decide status and must be considered for each and every contract:

Control: This relates to the client’s rights and the extent of control they exert over the worker. It looks at control over ‘what’ tasks are performed and the ‘how,’ ‘when,’ and ‘where’ of their execution.

Personal service / substitution rights: This involves whether there’s a requirement for a specific individual to perform the work or if the client would accept anyone with the necessary skills and qualifications.

Mutuality of obligation: This relates to whether there is a reciprocal obligation between the client and the worker to offer and accept work, both during and beyond the termination of the contract.

Financial risk: This focuses on whether the worker assumes financial risk, which includes costs incurred in completing the work, responsibility for defective work and negligence, and the basis of payment.

Other factors to consider are the presence of employee rights or benefits, the worker’s integration within the client’s organisation, exclusive service arrangements, and shared intentions between both parties.

This list is not exhaustive, and each of these factors contributes to forming an overall picture that must be assessed in its entirety.

Potential risks and liabilities

Non-compliance with IR35 can result in significant risks and liabilities for you as an engager:

• Tax liabilities: If a contractor is wrongly classified as “outside IR35” when they should be “inside,” you could be held liable for any unpaid tax and NIC, plus interest and penalties.
• Penalties: HMRC can impose fines if you fail to take reasonable care in your determination process or if you do not meet your obligations under the Off-Payroll rules.
• Reputational damage: Being found non-compliant can harm your reputation and relationships with contractors, agencies, and other parties.

Final thoughts

IR35 compliance is not just about making a one-time determination. It requires ongoing diligence to ensure that the working practices of your contractors reflect the terms of your contracts and that your decisions hold up under scrutiny. Non-compliance carries financial and reputational risks, so taking reasonable care is essential.

If you are unsure of your obligations or need support or further IR35 guidance, contact Bauer & Cottrell today.

Are you a contractor working through your own limited company? Read our IR35 guidance for contractors here.