IR35 and off-payroll working rules

If a contractor works through their own limited company but would be an employee in all but name, IR35 says they should be taxed like one. Here is how the rules allocate that judgement – and the risk.

The core idea

IR35 targets “disguised employment”: someone working through a personal service company (PSC) on terms that look like employment, while paying less tax via dividends. If an engagement is “inside IR35”, PAYE tax and National Insurance must be deducted from the contractor’s fees, broadly as if they were on the payroll – including 15 percent employer NI, usually borne by the fee-payer or priced into the rate.

Who decides

For medium and large clients, the client determines status and must issue a Status Determination Statement; the fee-payer in the chain carries the tax risk. Where the client is a small company (broadly two of: turnover under £10,200,000, balance sheet under £5,100,000, 50 or fewer employees), the contractor’s own company remains responsible, as it always has been for genuinely private-sector small engagements.

What actually decides status

• Personal service – a genuine, exercisable right to send a substitute points away from employment.
• Control – who decides what, when, where and how the work is done.
• Mutuality of obligation – an expectation of continuous work offered and accepted looks like employment.
• Business on own account – own equipment, multiple clients, financial risk, insurance.

HMRC’s CEST tool gives a determination HMRC will stand behind if answered accurately, though it is criticised for skating over mutuality. Inside-IR35 contractors are often paid through umbrella companies – at which point the whole of normal payroll applies to them, and they can sanity-check their pay with the take-home pay calculator. See also payroll services for contractors.