IR35 FAQs

In assessing a contractor’s IR35 status, end hirers are required to look at the degree of ‘control’ they have over what, how, when and where the work is done.

IR35 assessments cover a number of areas in working out whether an individual has a genuinely independent contractor relationship. One of these is ‘control’.

The level of control applied by the end hirer over the work – along with how, when and where it is are provided – is very important for determining IR35 status.

‘Control’ is one of the key three indicators (including the right to provide a substitute to perform your work and whether mutuality of obligation exists) which comprise the principles for the “tests of employment” in an IR35 status assessment.

The level of control applied by the end hirer over the services which are to be provided, as well as how, when and where they are provided is highly important for determining IR35 status.

It is acceptable for a contractor to mutually agree to carry out a particular task at a specific time and place with the end hirer, but they should not be subject to any control or supervision from the end hirer; it should be clear that the contractor is able to execute the work according to how they decide.

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 in order to ensure the services are progressing according to the overall project plan.

Substitution is a very important component when determining your IR35 status. Proving that someone else could provide the same work on your behalf (and you have the right to provide a substitute in your contract) can have a huge impact on your ability to continue working and being paid through your limited company.

In working out your IR35 status, an end hirer will consider a number of things, including ‘substitution’ – whether or not you can provide a substitute to deliver on the contract instead of you.

This question of whether your skills can be substituted – of if you are always required to carry out the work yourself – is a key method of distinguishing a contractor relationship from an employee relationship. 

Because your contract is between the end hirer and your limited company – not you personally – it shouldn’t matter if the work is completed by another equally skilled professional working under the limited company. A clause in your contract, stating that a substitute would be acceptable, helps to ensure that your status falls outside IR35 with that end hirer.

A contractor’s IR35 status effectively determines their tax position with HMRC. It is assessed by the hirer completing an SDS on the contractor’s behalf.

IR35 is legislation used by HMRC to work out whether a contractor should be taxed as an employee according to PAYE rules, or on a limited company basis, withdrawing funds primarily as dividends. A contractor’s IR35 status therefore determines which one applies to them.

The system used to establish a contractor’s status is called an SDS. This assessment uses three key factors in working a status out: supervision, direction and control, right of substitution and mutuality of obligation.

As a general rule, the greater the supervision, direction and control imposed by an end hirer, the more likely it is that the contractor’s status will fall inside IR35 and they will be taxed under PAYE.

It is the end hirers responsibility to assess IR35 status, irrespective of whether it’s a public or private sector contract. They need to complete an employment assessment checklist which takes into consideration the key IR35 indicators.

IR35 legislation applies to anyone who supplies their personal services to end hirers via their own limited company, sometimes known as a ‘PSC’ (Personal Service Company).

In the contracting sector, a PSC is generally taken to mean a limited company with just one director. This director is usually the contractor themselves, who owns most or all of the shares and does most or all of the work.

PSC‘s generally supply professional services to hirers, either directly or via an agency. Because the company is essentially built round one person, the line between company and employee can easily be crossed. IR35 legislation exists to clarify and enforce that line.

As a general rule, if you are providing your services as a PSC – and you normally fall within the scope of the UK charge to tax – the new private sector IR35 legislation will apply to you, and you will need to be assessed.

If you don’t perform your duties in the UK and/or you aren’t a resident in the UK during the year, IR35 probably doesn’t apply to you.

Updated on 1st April 2020

IR35 investigations have historically been triggered directly by HMRC campaigns into specific sectors.

Currently, a compliance review by HMRC into any other aspect of company tax – such as corporation tax, VAT or PAYE – could lead to a company being passed over to the HMRC IR35 team. HMRC have stated that, after the legislation change in April 2021, no retrospective reviews will be carried out. However, it’s not clear if this will be an established policy.

As things stand, an IR35 enquiry window is twelve months, from the date you file your last self-assessment return (or corporation tax return). HMRC can only trigger a discovery assessment enquiry outside this 12-month window, under certain circumstances. These include if they suspect there has been a potential loss of tax due to careless or deliberate behaviour, or if they didn’t have full information when the enquiry limit expired.

From April 2021, if you are providing services through a Limited Company, you can’t avoid your end hirer assessing your IR35 status and providing you with an SDS.

However, if your working practices and contract are clearly that of self-employment then your status will be reflected clearly in your SDS. You can then continue to withdraw income from your company in a tax efficient manner. If you need advice on how to make your contract robust from an IR35 perspective, simply get in touch with the Brookson Legal team.

No. Even with the latest changes to IR35 assessments in the private sector, HMRC have said that decisions about contractor status will not be made retrospectively- however, it is unclear if this is a HMRC policy.

Whilst HMRC have said they won’t be reviewing past decisions after the latest 2021 legislation change, and back dating tax payments, they have confirmed certain exceptions. Rules may be made retrospectively if they suspect fraud or criminal behaviour has occurred.

If you are IR35 captured then you can continue to make pension contributions. However, the rules are different depending on whether you make the contribution through your company when captured or as an employee via an umbrella company.

Pension contributions working through an Umbrella Company 

Currently, government rules dictate that all employees who meet certain criteria must be auto-enrolled under a pension scheme. If you work through an umbrella company, this will probably apply to you, and if you wish to contribute more you usually can via a pension salary sacrifice arrangement.

Therefore, giving up part of your salary enables you to pay funds into a pension pot. Because you will be earning a lower wage, there will also be some tax and National Insurance savings.

Pension contributions working through your Limited Company when captured by IR35

If you choose to continue to work through your PSC when captured you’ll receive funds into your company with the income tax and National Insurance already deducted. 

Working whilst captured in this way through a whole accounting period will allow you to deduct company running costs and company pension costs-but since all your income has been taxed already then your profits will not be subject to corporation tax. This means there are no real tax benefits to making a company pension contribution, since you won’t get any tax relief on them. However, if you have a mix of captured and non-captured income, you may find that making company contributions is still tax efficient.

Yes. Working through your Limited Company (PSC) when captured by IR35 prevents you from claiming travel and related subsistence costs.

Once you have been captured by IR35, HMRC consider your worksite to be permanent in nature. You are a commuter, which means that you are no longer entitled to claim tax relief on travel and subsistence. In effect you will be treated just like any permanent worker whilst working under that contract. However, you can still claim costs related to running your business such as accountancy fees.

Yes. You can work through your limited company (PSC) or under an umbrella company. You may wish to seek guidance as to which will be the best solution for you. 

Contractors captured by IR35 can invoice end hirers and withdraw funds either as a limited company or umbrella company, but many contractors work on a mix of assignments that fall inside and outside of IR35 at the same time. This means that there are a number of solutions available. You could work exclusively through your limited company or umbrella company, or split them – delivering work only through your umbrella company within IR35 captured assignments.

There’s no obligation either way and depends on your personal circumstances. To work out the best solution for you we recommend seeking advice from the Brookson team.

IR35 status assessments are required every time you engage with a new contract or make a change to your contract. But we recommend undertaking an independent IR35 status assessment through Brookson Legal if you disagree with your end hirers process and outcome.

IR35 assessments are only required at the start of a contracted assignment. If your working relationship doesn’t change from that point, then your SDS will remain valid for as long as you need it to.

However, if you disagree with your end hirers decision as outlined in your SDS, you are entitled to undertake an independent IR35 review in order to challenge it. Brookson Legal can support you when engaging with your end hirer and will undertake an IR35 review if required.

The outcome of your challenge – whatever it may be – will then stand for the foreseeable future. You won’t need another IR35 status assessment with that end hirer unless your contracted work changes in some way.  

IR35 legislation states that an end hirer must take ‘reasonable care’ in assessing all contracts, to establish whether the individual would be seen an employee when carrying out the necessary work. If they fail to take reasonable care, the end hirer will be responsible for calculating the deemed direct payment, paying it over and reporting the tax and NICs that result.

All end hirers are responsible for completing an SDS for their contractors. The law states that they must do this with reasonable care, to prevent them from not looking at each individual case properly.

If an organisation makes a blanket ban decision that all contractors work for them via an individual PSC are IR35 captured, this would certainly be seen as failing to take reasonable care. 

The definition of ‘reasonable care’ in this context is acting in a way that would be expected of a prudent and reasonable person in the end hirers position. For example, they should keep records of the employment status test and apply appropriate judgement when using HMRC’s CEST tool. It is also assumed that they will seek professional advice to help them in any areas where they are unclear.

An SDS is therefore deemed invalid, unless it contains the following:

• A statement as to whether or not you would be an employee or an office holder if you were directly engaged by the end hirer.
• Clear reasons for coming to that conclusion
• Reasonable care in coming to that conclusion

Part of taking ‘reasonable care’ is having a robust review framework in place, to give you a clear understanding of how that decision has been reached. If it’s not clear, or you believe the conclusion is flawed, you are legally entitled to challenge the decision with an independent review of your own.

CEST is an online tool HMRC have created to help companies establish whether or not a particular contract falls within IR35.  CEST – or Check Employment Status for Tax – is a simple tool designed to make IR35 assessments quick and simple for companies who find themselves responsible for providing an SDS to their contractors. Whilst it is both simple and quick to use, it has been criticised as being flawed and skewed towards capturing contractor’s within IR35. In response to this criticism, HMRC recently released an updated version of CEST with a number of tweaked questions. Even with these changes, we are under the impression that it’s an unreliable IR35 support tool – primarily because it doesn’t fully take into account mutuality of obligation, one of the key IR35 indicators. The amended questions are still not sophisticated enough to produce a reliable opinion, based on the individual’s working arrangements. For this reason we recommend that contractor’s treat the CEST tool with caution and undertake independent IR35 reviews instead, wherever possible.  

No, the way IR35 legislation is assessed isn’t changing, it is just the person responsible for making the assessment that is. This change came into effect from April 2021.

IR35 assessments are designed to establish whether a contractor is engaged under a contract of service (an employment contract) or a contract for services (a self-employed contract).

In other words, the assessment seeks to understand if the relationship is genuinely independent or essentially employment in disguise. Historically, this assessment has been the responsibility of the contractor when working for the private sector. But the legislative changes now in place make it the responsibility of the end hirer.

In assessing a contractor’s IR35 status, the end hirer will continue to use the following key criteria:

• Control – Does the engagement between the end hirer and contractor look and feel like employment?
• Personal service – Is the contractor required to carry out the work themselves? Can they send a substitute?
• Mutuality of obligation – Is the end hirer obliged to offer work beyond the agreed project and is the contractor obliged to accept it?

There is lots of established IR35 case law, much of which specifically looks at whether an individual was a ‘disguised employee’ or not.

Brookson Legal has a long history of advising all kinds of people, organisation and public bodies on IR35 and our understanding of case law precedents is among the most rigorous in the industry.

The following cases are specifically related to IR35 legislation where HMRC wanted to establish that an individual was a disguised employee working through their PSC in order to tax the individual on a PAYE basis.

Below is an overview of recent cases and the elements considered by Courts and Tribunals in making their decisions.

You can find more related cases on the Brookson Legal website.

If you strongly disagree with your end hirers assessment of your IR35 status, one of our Business Advisory Team will request an IR35 review from the Brookson Legal team to help you challenge the decision.

Brookson Legal are on hand to help with any disagreements you may have with your SDS. Brookson Legal provides a range of advice on IR35 tax legislation to all levels of the flexible working supply chain – from contractors to agencies and hirers. If you are a contractor then Brookson Legal can provide an independent employment status assessment to support any concerns you may have about your SDS.

It’s worth remembering that the team may agree with your end hirers decision, but if they agree with you then their review will provide you with a strong case to challenge and hopefully reverse the assessment.

From April 2021, it is the end hirers responsibility to assess IR35 status on behalf of you, the contractor. So even if you are a director of your own limited company, you no longer have that responsibility moving forward.

Whether your working relationship falls inside or outside IR35 depends entirely on your personal circumstances and contract. However now, all contractor’s will be assessed by their end hirer and given a SDS. Your responsibility is therefore reduced – you just need to understand how you’ve been paid and double check that it’s right.

If you are not captured on a particular assignment, then you can simply work and invoice as usual. If you are captured, then you continue to raise your sales invoices as normal however the funds you receive from your fee payer will have already the necessary PAYE tax deductions.

As long as you only withdraw the net amount of the funds you receive, you won’t need to worry about any further tax consequences. Your accountant should produce statutory accounts that show your income with this tax deducted, to make sure things are clear. It may be that invoicing through a limited company is not as tax efficient as operating partly or wholly under an umbrella company, so it’s worth seeking expert advice on which is the best solution for you.

It’s important to remember, however, that whilst working on an IR35 captured assignment you can’t claim travel or subsistence costs for travel to your main site through your Limited Company (PSC). The only tax relief you can claim is for standard business functions such as accountancy fees and business insurance. 

If you are inside IR35, your ‘fee payer’ is the party above your Limited Company (PSC) who is responsible for deducting national insurance and tax before paying you net earnings.

For most contractors, the fee payer is normally a recruitment agency, since they are the party above the PSC responsible for transferring funds into your account. However, if your PSC is paid directly by the end hirer then they will be the fee payer, which means they would be responsible for deducting tax and National Insurance contributions from your net invoice.  

It is up to the end hirer that you are working for to assess your IR35 status. Their HR department should provide you with a SDS explaining your status. If you think their assessment is wrong, Brookson legal can help.

IR35 can be confusing and it’s important that assessments are undertaken accurately. However, if you’ve been assessed for IR35 by your end hirer and you feel that their IR35 SDS does not fully reflect your working arrangements, all is not lost.

Brookson Legal can assist by providing an IR35 review. The outcome of this review is an independent assessment of your employment status. It can be provided to your end hirer to help them reassess your employment status if you dispute their decision.  

As part of your end hirers legal obligation to assess you, they need to take reasonable care in making a decision and provide the reasons. Formally disputing an SDS decision is not uncommon, and Brookson Legal will guide you through the process to make sure the evaluation is fair and your challenge is grounded in the best possible evidence.

Many end hirers will simply use the HMRC CEST tool. This can be done on the HMRC website at no extra cost to the user, but independent reviews are often preferable. CEST has acknowledged flaws and was historically weighted towards IR35 capture. Recent updates have been made, but it is still unclear whether questions have been included to rectify this imbalance.

Being inside IR35 impacts the way you are taxed, since HMRC will deem that you should follow PAYE rules not limited company rules. You may therefore find your after tax earnings are lower in comparison.

If you are a contractor and your end hirer decides that you fall inside IR35, then you will receive your payments from them into your PSC in the form of a ‘deemed payment’. This means that the fee payer (usually a recruitment agency but sometimes an end hirer) will deduct your income tax and national insurance directly from these payments through their own payroll system, before they reach your bank account. Alternatively you can be taxed on a PAYE basis via an umbrella solution. 

Being taxed on a PAYE basis isn’t as tax efficient as taking a small salary and dividends from your company, so you will pay more tax – whether you do it through your own limited company or through an umbrella company. However, the real impact on your finances depends on your personal circumstances.

If you are working via your limited company on a captured assignment inside IR35, the fee payer will deduct your National Insurance contributions and income tax before making the payment into your company bank account. You can then withdraw the payment as a dividend – without worrying about any more tax implications.

If you are registered for VAT, you will continue to receive the VAT element of your invoice which you will pay directly over to HMRC. Whilst your tax will be taken care of, you still need to make sure there are funds in the company account to cover running costs such as accountancy fees and insurance.

This is a question that can only be answered by your end hirer. It is their responsibility to undertake an assessment that clearly tells you and HMRC whether your working relationship with them falls inside or outside of IR35.

Whether you are inside or outside IR35 is an important thing to understand. It impacts the way you earn and pay tax, so there are legal implications for both you and your end hirer. The assessment process is designed to safeguard HMRC from contractors essentially getting the tax benefits of being a limited company whilst undertaking a full-time role with little or no risk.

By completing an SDS, your end hirer will generally look at how much supervision you need, how much direction you take and how much control you have whilst doing the work – amongst other indicators of employment or self-employment.

Generally, the less freedom you have and the more instructions you are given in your work, the more likely it is that you fall inside IR35 and will need to be paid and taxed as an employee with PAYE and NIC.

It is the end hirers responsibility to determine a contractor’s IR35 status and provide them with an SDS. This applies to both Public and Private Sectors.

Currently, the law states that it is only up to the public sector end hirer to assess their contractors for IR35 and determine their status.

Historically,  private sector organisations could leave it to the individual contractor. However, these rules have now changed. So from April 2021 even if you are a contractor and used to self-assess your own IR35 status, you no longer have this responsibility. The legal responsibility for assessing IR35 – public or private – falls with your end hirer.

IR35 is a piece of government legislation created to help distinguish genuinely independent contractors from those who are essentially disguised employees.

IR35 was introduced by HMRC in 2000 to tackle the problem of contractors working full time via their PSC to gain tax advantages.

Every contractor’s IR35 ‘status’ effectively determines their tax position with HMRC. End hirers are required to scrutinise the roles and responsibilities of every contractor they hire according to the rules laid down within IR35.

The outcome of a SDS completed by the hirer will determine whether a contractor is genuinely independent and bearing the risk of self-employment  – and therefore entitled to tax advantages – or if they are essentially performing the role of a PAYE employee. If a contractor’s relationship with their end hirer falls inside IR35, they will be taxed according to PAYE. If it falls outside, they will be taxed as a Limited Company, where they can primarily withdraw funds as dividends.