What is IR35? (off-payroll working)

IR35 is now referred to as the off-payroll working rules and can apply when a worker/contractor provides their services to a client through their own limited company or another type of intermediary. An intermediary can also include any of the following:

• A partnership
• A personal service company
• An individual

The rules were put in place to ensure that workers, who would have normally been an employee if they provided their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.

Who’s affected?  

You may be affected if you are: 

• A worker providing services through your intermediary 
• A client receiving services from a worker through their intermediary 
• An agency providing workers’ services through their intermediary 

How is it assessed? 

The main factors that are considered when determining the employment status of a worker are: 

• Control, direction and supervision – what level of control, direction and supervision does your client have over how you operate, such as, how, when and where you complete the work? 
• Mutuality of obligation – is your client obliged to offer you work and are you obliged to accept it?
• Substitution – do you have to carry out the work yourself or can you send somebody else in your place?

Other considerations include: 

• How the worker is paid – normally a self-employed person will receive payment once a project has been completed or at set milestones in the project, whereas, an employee will usually be paid on the hours they have worked 
• Location – does the client decide where the worker completes the work e.g. their premises or does the worker have control over where they work 
• Equipment – usually a self-employed person would have their own equipment. Unless there is a good reason, such as data security, then the worker should not use the client’s equipment 
• Benefits – if you receive any benefits usually attributable to employment then this would not look like self-employment. E.g. sick pay, holiday pay, maternity pay, pension
• Financial risk – the worker should bear the financial risk of the project to indicate self-employment. If work needs to be re-done or amended then this should be at the workers expense and not the client’s
• Distancing – the worker should be wary of taking on any tasks or responsibilities that would normally be undertaken by an employee. E.g. managing staff of the client 

If HMRC believe that the working practices of the engagement are not representative of the contract then they will likely ignore the written intentions of the contract.  

You can check your status by using the “Check Employment Status for Tax” online service. This will assist you in determining whether your engagement should be classed as employed or self-employed for tax purposes – https://www.gov.uk/guidance/check-employment-status-for-tax.  

When do the rules apply? 

 The rules apply on a contract-by-contract basis so it is possible for a worker to have a mixture of contracts where some fall within the off-payroll working rules and some do not. For the purpose of the rules a contract is a written, verbal or implied agreement between the parties.  

Before 6 April 2021 – if you’re a worker and your client is in the public sector, it is their responsibility to decide your employment status. If you’re a worker and your client is in the private sector, it is your responsibility to decide your own employment status.  

From 6 April 2021 – all public sector authorities and medium and large-sized private sector organisations will be responsible for deciding the employment status. If a worker provides services to a small client in the private sector then it is the worker’s intermediary who is responsible for deciding the worker’s employment status. 

What happens if my contract is inside of the off-payroll working rules?  

If your contract in inside of the rules then income tax and National Insurance contributions (NIC) must be deducted from your gross fee.  

Currently if you are working on a contract that is inside of the off-payroll working rules then deductions of income tax, employee NIC and employer NIC are the responsibility of your limited company.  

From 6 April 2021, if you are engaged by a small private sector client then it will remain your limited company’s responsibility to deduct income tax and National Insurance. However, if you are engaged by a public sector authority or a medium/large-sized organisation then the fee-payer (the entity that pays you) will deduct the income tax and National Insurance from your gross payment. Student loan deductions remain the responsibility of the worker.   

Any expenses incurred by the worker that would normally be allowable for an employee can be deducted from the gross fee before income tax and National Insurance are calculated. Please be aware that travel to and from the workplace would be ordinary commuting as it is deemed a permanent workplace and therefore there is no tax relief for travel and subsistence.  

It is worth noting that even if you are deemed to be employed for tax purposes, you do not acquire any employment rights.   

You can read more about employment status’ in the government guide https://www.gov.uk/employment-status 

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