IR35, also known as the intermediaries legislation, and more recently the “off-payroll working rules”, is UK anti-avoidance tax legislation that was first implemented in the year 2000 under Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003, and is concerned with employment status for tax purposes.
The legislation is relevant to workers who provide services or work through an entity (an “intermediary”) such as a limited company or partnership. Trading through such an entity on a genuinely self-employed basis brings with it certain tax advantages. However, prior to the implementation of IR35, this framework was susceptible to exploitation.
In a nutshell, the legislation is designed to tackle “disguised employment” and ensure that workers who receive payments from a client/engager through an intermediary, and whose relationship with that client resembles that of an employee, are taxed broadly the same as an employee.
“Inside IR35” – the relationship with the client amounts to employment for tax purposes and therefore employee rates of tax are due on the entire income.
“Outside IR35” – the relationship with the client reflects that of genuine self-employment and therefore awards the tax advantages of working for your own business. Where contractors want to be!
Historically, the responsibility and liability for deciding the IR35 status (“inside” or “outside” – common terms used for whether IR35 applies or not) of all relevant engagements, and for taking reasonable care in making that decision, had rested with the worker of the limited company (the contractor) in all cases, along with the requirement to treat their company tax affairs accordingly.
In 2017, IR35 underwent a significant change whereby the responsibility for the status decision for any engagements with public sector clients, shifted from the contractor to the public sector client, along with the requirement for the “fee payer” (usually the client itself or an agency) to make “deemed employment deductions” on the payments made to the worker’s intermediary in cases where the client deems the engagement to be inside IR35.
In April 2021, these new rules were further expanded to engagements with medium and large sized private sector clients, along with some further changes such as the requirement for the client to produce formal “Status Determination Statements” (SDSs) and also mechanisms allowing workers to appeal their client’s determination if they did not agree with it.
These newer rules are set out under Chapter 10 of the Income Tax (Earnings & Pensions) Act 2003. Whilst Chapter 8 still applies in some cases, Chapter 10 now governs the majority of limited company contractor engagements.
Whilst the reforms to the IR35 rules have changed who is responsible for making the IR35 decision, the actual factors that decide status remain the same and are underpinned by many years of IR35 and employment status case law.
When establishing status it is necessary to consider the both the written contract and most importantly, the reality of the working practices that are evident in the individual worker’s day-to-day relationship with the client.
Control: the rights of, and the extent and degree of control exercised by the client over the worker. This concerns control over ‘what’ work is done and ‘how’, ‘when’ and ‘where’ it is done.
Personal service / rights of substitution: whether there is the requirement for the work to be carried out by a specific individual, or whether the client would accept anyone as long as they are suitably skilled and qualified.
Mutuality of obligation: whether there is a mutual obligation between the client and the worker to offer and accept work.
Financial risk: whether the worker bears a financial risk, including with respect to costs they incur in carrying out the work, responsibility for defective work and negligence, and the basis of payment.
Other factors include: the existence of employee rights or benefits, termination rights, whether the worker is part and parcel of the client’s organisation, exclusive services and mutual intention.
This list is not exhaustive, and they are all considerations that go towards painting an overall picture which must be evaluated as a whole.
How you are impacted by IR35 will depend upon whether the engagement falls under Chapter 8 or Chapter 10, and also where you sit in the contractual chain.
The table below gives a high-level view of each party’s responsibilities under both the pre-existing (chapter 8) and the newer (chapter 10) rules:
|Limited company contractors||Public sector & medium / large private sector engagers||Agencies / employment businesses / recruiters / other parties in the chain (where chapter 10 applies)|
|Remain responsible & liable under Chapter 8 for deciding their own IR35 status for all engagements with small and wholly overseas clients.
No requirement to produce an SDS but must take “reasonable care”.
|Responsible for making the IR35 decision and passing the associated SDS to the worker and any agencies/other parties it contracts with.
Liable for taking “reasonable care” and all associated tax / NIC and penalties.
Responsible for implementing a dispute resolution process and responding to all appeals by contractors within 45 days.
|Where directly above the worker’s intermediary in the contractual chain (the “fee payer”: is the “deemed employer” and required to make and account for deemed employment deductions if the engager has determined inside IR35.
Also liable for all tax / NIC if the engager’s IR35 decision is ever overturned but made with reasonable care.
Where not directly above the worker’s intermediary – responsible for passing the SDS to the next party in the chain otherwise liable for the tax/NIC.
Non-compliance with today’s IR35 / off-payroll rules can have significant implications and liabilities for contractors, engagers and agencies, and potentially any other parties within the contractual chain.
Tax Liability: if a contractor is wrongly classified as “outside IR35” when they should be “inside IR35,” the liable party may face hefty tax bills for unpaid tax and National Insurance contributions.
Interest and Penalties: HMRC may impose interest and penalties for unpaid taxes, which can accumulate over time.
Loss of Tax Benefits: contractors may lose out on tax benefits associated with operating through their own limited company if they are incorrectly deemed “inside IR35” by their client.
Reputation Damage: engagers and contractors may experience damage to their professional reputation if they are found to have been non-compliant with tax regulations.
To mitigate these risks, it’s essential for contractors and engagers to robustly assess IR35 status for each engagement and demonstrate reasonable care in this process.
If you do not wish to delve deeply into this complex legislation but do want the peace of mind knowing you are meeting your legal obligations then as renowned IR35 specialists, Bauer & Cottrell can assist you in mitigating these risks.
Need help? Call us today on 01525 406622 or enquire below.