IR35 Guidance for Contractors, Agencies, and End Hirers
Access expert IR35 guidance including comprehensive FAQs, practical guides, and video resources designed to help you navigate employment status regulations with confidence.
What is IR35?
IR35 is the name commonly given to tax legislation introduced in 2000. The purpose of the legislation is to distinguish between the genuinely self-employed working through an intermediary (typically their own limited company, or “personal service company”, “PSC”) and those who work through a PSC but whose working practices and contract suggest they operate more like an employee (or “disguised employee”, to use IR35 language ). The genuinely self-employed (i.e. those Outside IR35) will usually receive gross payment for their services via their PSC, allowing them to pay some of their income in dividends. This usually creates a tax benefit; operating in this way will usually reduce the amount of National Insurance payable. “Disguised employees” (i.e. those Inside IR35) should pay broadly the same income tax and National Insurance as an equivalent employee would.
What are the employment tests established by the courts?
When determining whether a worker is genuinely self-employed or a “disguised employee”, employment status tests should be applied. However, these employment status tests have not been codified and there is no set legislative checklist that can be considered to determine whether someone is a true independent contractor. Employment status tests established in decades of case law must be understood and applied. The relevant tests include:
- Can the contractor provide a substitute?
- Is the contractor subject to the client’s control?
- Is there a mutuality of obligations between the contractor and the client?
- Does the contractor bear any financial risk?
- Does the contractor invest in theirown business?
- Does the contractor provide its own equipment and training?
- Does the contractor receive holiday, sick, or maternity pay from its client?
What is control?
Independent contractors should have a high degree of expertise and knowledge. Therefore, generally speaking, they should not be subject to a great deal of control. There are various limbs to “control”: how, where, what and when the work is to be carried out. However, “control” should not be confused with monitoring the progress or quality of the work being undertaken, as the latter is a reasonable approach adopted by end hirers to ensure the services are progressing according to the overall project plan.
What is mutuality of obligation?
If the end hirer is obliged to provide the contractor with work to carry out on an ongoing basis and the contractor has an obligation to carry out that work, it can show that there is a “mutuality of obligation” between the parties.
To rebut this presumption, the contractor should be engaged for a specific project or assignment. Once the project or assignment has ended or been completed that should signify the end of the contractor’s engagement with the end-hirer. There should be no expectation on the end hirer to offer any additional work to the contractor, or if it does offer additional work, there should be no obligation on the contractor to accept it.
Furthermore, the end hirer should not request the contractor to perform tasks outside the terms of the assignment. If the contractor was to carry out such tasks without the terms of the engagement being revised, it could be indicative of employment.
What is the right of substitution?
There should be no obligation on the contractor to provide a personal service to the end hirer, as personal service is a strong indicator of employment. Instead the arrangment should be between the end hirer and the PSC. There has been case law which demonstrates that where a contractor has exercised their right of substitution in practice, they are clearly not providing a personal service and are therefore operating outside of IR35. Many contracts by which contractors provide their services will include a “right of substitution” clause. However, the courts will usually look behind the terms and examine whether a true right of substitution exists.
What changes have been introduced to IR35 in the public sector?
From its introduction in 2000 until changes were introduced in the public sector in 2017, the obligation for determining employment status rested with the PSC. Similarly, any tax risk also rested with the PSC. From April 2017 in the public sector, the responsibility for determining IR35 status moved to the public sector end hirer.
What changes have been introduced to IR35 in the private sector?
As of April 2021, medium and large sized private sector hirers became responsible for determining the IR35 status of the contractors they engage.
How does IR35 affect umbrella companies?
Umbrella companies pay income tax and National Insurance for the workers they engage on a PAYE employment basis; therefore IR35 does not apply. It is likely that some flexible workers, previously working in the private sector as PSC contractors, have moved to umbrella employment if the end hirer determined they were operating as “disguised employees”.
What should end hirers know about IR35?
End hirers should take steps to understand and assess their off-payroll workforce. End hirers should implement a process of determining the status of the off-payroll workers they engage to understand which workers fall inside and outside IR35. End hirers should also consider the potential cost implications for a worker who is inside IR35 and what options are available to them moving forward.
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Why are private sector businesses responsible for IR35?
In April 2021, HMRC introduced IR35 into the private sector, shifting the responsibility for ensuring that contractors are working compliantly to the end hirer. This means that medium and large sized end hirer businesses must assess the IR35 status of roles they advertise and ensure that the correct amount of tax is being paid, all whilst demonstrating ‘reasonable care’. Failure to meet these requirements can lead to end hirers being liable for fines and penalties.
What does my business need to do if we receive an IR35 investigation letter from HMRC?
Upon receiving the IR35 investigation letter from HMRC, your initial step should be to acknowledge receipt of the letter. The letter will also contain instructions regarding the specific evidence and documentation required, along with the tax year under investigation. Your business should promptly begin gathering the requisite evidence for presentation to HMRC. Please reach out to us for support with your reply.
What documentation and details will my business need to provide to HMRC?
Your business will need to provide evidence and documentation of your off-payroll working procedures, your involvement with personal service companies (PSCs), and the data you have from businesses like agencies or labour providers. HMRC will confirm which tax year the investigation is focusing on.
How long does my business have to confirm receipt of the HMRC letter?
Your business will need to acknowledge receipt of the initial HMRC letter in approximately seven days, although the letter will specify the date you need to respond by.
How long does my business have to reply to HMRC?
Your business will have approximately 28 days to collate all information required and respond to the HMRC letter, however the exact timeframe will be included in HMRC’s letter so please ensure this is adhered to.’
Note: Everything must be submitted and the deadline cannot be missed.
What if my business does not have the information HMRC is asking for?
It is unlikely you will be able to demonstrate compliance and ‘reasonable care’, meaning your business will have not met the terms set by the legislation. This could result in liability for fines and penalties.
Note: If you think your business is at risk, get in touch with our team for further advice.
How long will it take for HMRC to respond to my business?
HMRC have varying time scales and will respond once they have reviewed your submission. A follow up meeting with your business may be scheduled to go over the information you have submitted.
Who in my business needs to attend the meeting or investigation session with HMRC?
There is no limit on the number of participants for the meeting. All staff members who contributed to completing the information submitted to HMRC should attend as they will need to provide detailed answers to questions. During the meeting, HMRC may explore your IR35 processes, status determinations, and evidence.
Note: All questions must be answered. If HMRC has any doubts or you cannot provide an answer, this can trigger a deeper investigation.
What happens after the meeting or interview with HMRC?
All the information provided prior to and discussed during the interview will be reviewed by HMRC’s technical team.
When will my business know the outcome of the HMRC investigation?
Your business can expect to hear back from HMRC with the outcome in writing. This will outline whether any further action (such as follow-up meetings or additional documents to be supplied) is required or if you have currently been found compliant based on the information supplied.
How can my business prepare for an HMRC investigation?
Your business should seek expert guidance and support to collate the correct information and run a mock audit to help identify—and importantly address—any potential problem areas. This will not only help ensure compliance but also confidence and familiarity with HMRC’s processes should you be investigated. Book a call with Brookson Legal and make sure you are prepared.
[link to mock investigation service line]
How did the private sector changes to IR35 impact recruiters?
Recruiters were likely to have seen their clients looking to them for advice and support regarding their new obligations, and those recruiters without the necessary knowledge to support their clients had to find that expertise elsewhere. Secondly, recruiters were quite likely to have seen some of their contractors, particularly those who had scarce skills and who were deemed to be ‘disguised employees’ by their hirers, seeking improved day rates, which might have led to a squeeze on agency margins.
What risks do I have as an agency?
You may have noticed an increase in questions from candidates regarding their IR35 status and clients will have wanted you to help them with the compliance challenges.
There has been much publicity, quite rightly, on the hirer’s obligation under IR35 and on the tax risk which comes with not taking reasonable care. However, the legislation still says that it is the fee payer (which will usually be the agency) who must deduct the correct income tax and NICs. This means that HMRC might pursue the agency if it considers that incorrect income tax and NICs have not been deducted.
How can I ensure compliance as a recruitment agency?
Be on hand to help your clients by introducing them to expert help and support such as Brookson Legal.
Follow your client’s IR35 outcome accordingly. If they say an engagement is Inside IR35, ensure you are paying taxes compliantly.
Do not try to reinvent the wheel and offer to step into the supply chain and “become” the end hirer. HMRC have seen these practices and are investigating them.
Please contact us for specific guidance on ensuring compliance with IR35 regulations as a recruitment agency.
How can recruitment agencies help clients and contractors when it comes to IR35?
Recruitment agencies have the capacity to provide valuable assistance in the realm of IR35 assessments, aiding end clients in the accurate determination of a contractor’s status. This service not only simplifies the compliance process but also underscores the agency’s dedication to assisting clients in meeting their legal obligations.
Moreover, agencies can play a pivotal role in educating contractors about IR35 regulations and offering guidance on optimising their tax affairs. Whether through workshops, resource materials, or collaboration with tax experts, agencies have the means to empower contractors with the knowledge needed to make informed decisions. This not only enhances contractor satisfaction but also cultivates their loyalty.
Additionally, recruitment agencies can facilitate smoother transitions in response to changes in IR35 legislation by providing expert guidance on adjusting contracts and engagement models. By proactively embracing IR35, recruiters can bolster their reputation within the industry and reinforce their position as indispensable partners for both contractors and clients.
Brookson Legal can support you with this.
How do I know if I am the fee payer?
Frequently, it is the recruitment agency that assumes the role of the fee payer. The entity in the supply chain closest to the PSC based in the UK will meet the definition in most instances. This entity bears the responsibility for disbursing payments to the contractor. In cases where a role falls within IR35, fee payers are tasked with withholding taxes and National Insurance contributions, forwarding them to HMRC.
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What is IR35?
IR35 is a piece of tax legislation which came into force in 2000. Its purpose is to identify ‘disguised employees’ working through a PSC (limited company).
A contractor’s IR35 status determines their tax position with HMRC. Contractors working through a limited company who fall outside IR35 are entitled to receive gross payment and can therefore benefit from paying some of their income in dividends. Those who fall inside IR35 are regarded as ‘disguised employees’ for tax purposes and are only entitled to receive payment on a PAYE basis.
What changes were made to IR35 in 2021?
The responsibility for determining a contractor’s IR35 status moved from the contractor to the end hirer.
The end hirer is now responsible for determining the IR35 status of each role fulfilled by a limited company contractor and providing a Status Determination Statement (SDS) to the contractor and fee payer.
It is important for all end hirers to review the status of all limited company contractors engaged, as they will be liable for outstanding tax, penalties, and interest in the event reaosnable care has not been undertaken.
When were the changes to IR35 implemented?
The public sector IR35 changes were introduced in April 2017 and private sector changes were introduced in April 2021. This put an obligation on all public sector and medium to large sized private sector authorities to assess the status of contractors they engaged. These changes apply to all payments made.
Who is the fee payer?
More often than not, the fee payer will be the recruitment agency. The fee payer is the UK entity closest to the PSC in the supply chain and responsible for paying the PSC. Fee payers are responsible for following the end-hirer’s IR35 determination and if a role falls inside IR35, they are responsible for deducting the tax and National Insurance contributions and paying these to HMRC.
What is a Status Determination Statement?
End clients will be required to issue contractors with a Status Determination Statement (SDS), confirming the IR35 status of the role and reasons behind the determination. End hirers must pass the SDS to the next entity in the supply chain and to each off-payroll worker.
How often would you recommend getting an IR35 review?
We recommend that an IR35 status review is carried out at the beginning of every assignment and every six months whilst the assignment is ongoing or as and when changes occur, for example, if the contractor agrees to provide services in a different capacity or on a different project.
Do I need to get an IR35 review now that the rules have changed in the private sector?
If your end hirer is a UK public sector or medium to large sized private sector organisation, they are responsible for your employment status. However, if your client is outside the UK or they meet the small company definition, you will retain IR35 responsibility and should complete your own IR35 reviews.
What does a review from Brookson Legal consist of?
An IR35 status review carried out by Brookson Legal consists of a review of the contract and a review of the day-to-day working practices. We review your working practices by asking that you complete a questionnaire and having a discussion around how you operate. On the back of this discussion, Brookson Legal will confirm the outcome of the review and provide you with additional advice and recommendations on how you can strengthen your IR35 position.
Is there any benefit in working through my own limited company if I am inside or caught by IR35?
Yes, definitely. IR35 is assessed on each contract or assignment which the personal service company undertakes. You can be caught by IR35 on one assignment and not captured by IR35 on another. Even when you are caught by IR35, you can still benefit from being in the flat-rate VAT scheme and claim business expenses.
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What is IR35?
IR35 is legislation designed to combat tax avoidance and is enforced by HMRC. In a nutshell, it requires contractors who are treated the same as employees to pay the same tax as employees.
Is IR35 new?
Not at all. It was introduced in April 2000 for limited company contractors to comply with. Following an adjustment in 2017 for contractors in the public sector (whereby the public sector hirer took responsibility for ensuring compliance with IR35), changes in April 2021 were made to the private sector, whereby end clients (except small businesses) are required to make the determinations and, with support from their recruitment partners, ensure appropriate income tax and National Insurance (NI) deductions are deducted at source.m mi felis.
What constitutes a small business?
For a business to qualify as small, the business must satisfy two of the following criteria:
- A turnover of less than £15 million
- The balance sheet total is less than £7.5 million
- The business has fewer than 50 employees
What can we learn from the public sector changes?
The change in legislation does not ‘outlaw’ working through personal service companies (PSC). Although there may be some turbulence, ultimately, there is nothing to prevent engagement with independent consultants, provided they either operate as truly self-employed or additional tax is paid on their services.
What are the changes in the private sector?
The assessment responsibility has moved from the PSC contractor to the end hirer (unless the hirer is a small business entity). Where the end hirer is not responsible for payment to the PSC (for example where there is a recruitment business in the supply chain), the assessment outcome must be communicated to the fee payer (usually the recruiter) to ensure that the contractor receives the correct payment and deductions for PAYE and NICs are made if the engagement is determined to be inside the scope of IR35.
Who do the off-payroll working rules apply to?
The off-payroll working rules currently apply to any worker supplying their services through a PSC, public sector organisation, or private sector organisation. The change to the legislation transfers the assessment responsibility to public sector authorities and medium and large end hirers in the private sector. For small end hirers in the private sector, the responsibility for assessment will remain with the PSC.
What does 'inside IR35' mean?
‘Inside IR35’ is a term which usually means that the contract and working practices of the engagement are consistent with a ‘disguised employment’ relationship and should therefore be subject to income tax and National Insurance deductions at source, similar to an employee.
What does 'outside IR35' mean?
‘Outside IR35’ means that the contract and working practices are consistent with an arm’s length consultancy arrangement and not a ‘disguised employment’.
How is an IR35 status determined?
Assessment is based on a number of factors which have been built up via case law, which include supervision, direction and control, substitution, mutuality of obligation, financial risk, and integration into organisation (amongst a few others). Within these categories, an accurate assessment will also consider (but is not exclusive to) length of engagement, absence procedures, provision of equipment, rationale for consider the use of a contractor, alongside a full review of the services being provided.
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