IR35 rules (named after an Inland Revenue (IR) press release from 1999) were introduced to prevent contractors from working “off payroll” as a way of avoiding tax and national insurance contributions. IR35 tries to ensure that when contractors are effectively working in the same manner as employees, those contractors pay the same national insurance and income tax contributions as employees.
IR35 rules apply when a contractor provides services to a client via an ‘intermediary’, such as their own company, a partnership, or a personal service company (PSC). The IR35 rules were originally introduced in April 2000, but changes in April 2021 placed greater responsibility on medium and large-sized companies (along with public sector organisations) to assess the contractor’s employment status.
There are several aspects of IR35 that are worth noting:
‘Inside’ vs ‘Outside’ IR35: A contractor can be ‘inside’ or ‘outside’ IR35. Being ‘inside’ IR35 means the contractor is working within the remit of the powers of IR35. In short, the contractor is subject to the same income tax and national insurance contributions as if they were an employee. If a contractor is assessed as being ‘inside’ IR35, they may also be able to benefit from employee rights. Being ‘outside’ IR35 means the IR35 rules do not apply. The contractor can pay themselves a salary, plus further dividends which are exempt from national insurance contributions.
A contractor who is ‘inside’ IR35 will typically:
- Not have their own professional business identity or branding
- Be paid on a regular schedule, not on a per-project or task basis
- Receive employee benefits (such as sick pay)
- Use the client’s equipment, rather than their own
- Work at the client’s site, rather than their premises
- Work for a single client for a long period, rather than multiple clients in parallel
- Personally carry out and deliver the contracted work/tasks, rather than substituting another person (e.g., a subcontractor) to perform the work
- Be closely supervised by the client, with little control over when or how the work is performed
- Not expend any personal costs to fix or correct faulty or subpar work
Check Employment Status for Tax (CEST): The CEST tool provided by HMRC allows a hiring company (or a contractor themself) to perform an employment status assessment. The tool can be used to understand (a) if the IR35 rules apply to a contract, and (b) if a particular piece of work is classed as employment or self-employment. The tool runs through a series of questions, whereby each response affects the subsequent questions that are asked. The questions can include (as of April 2022):
- Has the worker ever sent a substitute to do this work?
- Does your organisation have the right to move the worker from the task they originally agreed to do?
- Does your organisation have the right to decide how the work is done?
- Does your organisation have the right to decide the worker’s working hours?
- Will the worker have to buy equipment before your organisation pays them?
- How will the worker be paid for this work?
- If your organisation was not happy with the work, would the worker have to put it right?
- Will you provide the worker with paid-for corporate benefits?
IR35 rules apply to an individual contract. This means that a contractor may undertake some contracts that are ‘inside’ IR35 and some contracts that are ‘outside’ IR35.