A brief overview

In this Off-Payroll Working / IR35 guide for engagers of contractors, we explore what it is and the importance of getting things right.

IR35 is UK tax legislation designed to address “disguised employment”, and has been in existence under Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 since the year 2000. There were significant reforms in 2017 (for the public sector) and 2021 (for medium & large private sector companies), which brought in Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003 – the Off-Payroll Working rules.  These changes shifted the responsibility for determining the IR35 status from the worker, to the company engaging them.

How is a medium or large company defined?

A medium or large private company is set out in the Companies Act, as exceeding two out of the following three thresholds for two consecutive financial years:

For accounting periods beginning on or after 6 April 2025:

• An annual turnover above £15 million
• A balance sheet total above £7.5 million
• more than 50 employees

NB – these new thresholds include a transitional provision, more info can be found here.

For accounting periods beginning prior to 6th April 2025:

• An annual turnover above £10.2 million
• A balance sheet total above £5.1 million
• more than 50 employees

If you are currently a small business which is approaching a transition to medium or large, read our guide on how to prepare for Off-Payroll Working here. 

As an engager, you are responsible for deciding whether the Off-Payroll Working rules apply to any contractors you engage who provide their services through an intermediary, such as a limited company. This decision is often described as determining whether a contract falls “inside IR35” or “outside IR35”. In essence, you need to assess if the worker’s working relationship with you resembles employment. If so, they should be taxed as an employee.

Key Responsibilities under Off-Payroll Working

1. OPW / IR35 Status Determination: You are responsible for determining the OPW / 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” (i.e. the OPW rules apply), 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 Off-Payroll Working and IR35 guidance platforms here.

What is the difference between inside and outside IR35?

• “Inside IR35” (Off-Payroll Working rules apply): 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” (Off-Payroll Working rules do not apply): 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 Off-Payroll Working / IR35 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’s 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.

In business on your own account: whether the worker is operating as a true business, with things such as multiple clients, own equipment and office, employees, business insurance, branding and websites.

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 / the Off-Payroll Working rules can result in significant risks and liabilities for you as an engager:

• Tax liabilities: If a contractor is wrongly classified as outside IR35, 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.

Read more about what a typical HMRC IR35 check covers here.

Final thoughts

OPW / 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 significant financial 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.