Definition
Tax legislation designed to prevent tax avoidance by workers who provide their services through an intermediary (typically a personal service company) but who would be classed as employees if engaged directly. The rules ensure these workers pay broadly the same tax as employees.
UK Context
IR35 has been in place since 2000, with significant reforms in April 2017 (public sector) and April 2021 (medium and large private sector employers). Under the reformed rules, the end client (not the contractor) is responsible for determining whether IR35 applies. Small companies are exempt from making the determination. HMRC's CEST tool assists with assessments.
Best Practices
- Conduct thorough IR35 status assessments for all contractors engaged through personal service companies
- Document the rationale for each determination and provide a Status Determination Statement to the contractor
- Review determinations when the working arrangements change and maintain an appeals process for disagreements
Frequently Asked Questions
Who is responsible for determining IR35 status?
For medium and large private sector organisations and all public sector bodies, the end client must determine the contractor's status. Small companies (meeting two of: turnover under 10.2 million, balance sheet under 5.1 million, fewer than 50 employees) are exempt, and the contractor self-assesses.
What happens if a contractor is inside IR35?
If the engagement is inside IR35, the fee-payer (the entity paying the contractor's company) must deduct income tax and employee National Insurance from the payment and pay employer National Insurance. The contractor's company can claim a 5% allowance for admin costs.