Off-Payroll Working Rules (IR35) - An Overview

What are HMRCs off payroll working rules (IR35)?

IR35 is designed to determine whether a contractor working through an intermediary (such as a limited company) should be treated as an employee for tax purposes. If IR35 applies, the contractor is subject to the same tax and National Insurance contributions as a regular employee.

From April 2021, the responsibility for determining whether a contract is inside IR35 (and thus subject to employee-like tax treatment) shifted from the contractor to the client for medium and large businesses in the private sector. Public sector clients have been responsible for this decision since 2017.

Key Factors to Determine Employment Status

• Control - Who controls how, when, and where the work is done? If the client has significant control, the worker may be deemed an employee. For example, if the contractor is required to attend a work location for regular working hours this would suggest that the contractor is considered an employee.

• Substitution - Can the worker send a substitute to do the work? If not, it’s more likely that the worker is considered an employee.

• Mutuality of Obligation - Is the client obliged to offer work, and is the worker expected to accept it? If there’s a continuous expectation of work, this suggests an employer-employee relationship.

Inside vs. Outside IR35:

Inside IR35 - If a contractor is inside IR35, it means they should pay the same tax and National Insurance as an employee. The client must deduct PAYE (income tax and national insurance) from any payments to the contractor. PAYE is then paid by the client to HMRC on the contractors’ behalf.

Outside IR35 - If a contractor is outside IR35, they can continue to take advantage of the tax benefits of working through a limited company.

Penalties and Compliance

If a worker or business incorrectly categorises a contract and doesn’t pay the appropriate taxes, penalties may apply.  Penalties can include paying back taxes, interest, and fines.

Summary

IR35 and off-payroll working are designed to ensure that workers who act like employees are taxed in a way that reflects their true working relationship with the client, even if they are working through an intermediary. This legislation aims to prevent tax avoidance by disguising employment as self-employment.

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