IR35 is the term used for the ‘intermediaries legislation’, which is a set of tax rules that apply to you if you work for a client through an intermediary. An intermediary can be a limited company, a partnership or a personal service company.
When workers carry out work for others, they may be engaged as employees or self-employed. An employee is an individual worker who has entered into, or works under, a contract of employment.
A self-employed person is an independent contractor who usually works under a contract for services. Self-employment has advantages for both you as the employer and also in many cases for the self-employed worker. Individuals working on a self-employed basis are often described as ‘freelancers’, ‘sole traders’, ‘self-employed’ or ‘individual contractors’ but use of these or other ‘labels’ does not determine whether a worker is self-employed rather than employed. By using particular terminology, the two parties cannot just decide the nature of the employment relationship between themselves: in law, the reality of the relationship has to be taken into consideration and the correct terminology used to match the reality.
If a contractor is working through an intermediary, such as a limited company, when they should instead be employed directly by the client they are working for and are treated as an employee, the IR35 kicks in. They are considered to be operating ‘inside IR35’.
IR35 within the public sector
The IR35 public sector rules were enacted in the Finance Act 2017. Where a public sector organisation engages a contractor, that organisation (or the recruitment agency through which the contractor is engaged) is responsible for determining whether the rules should apply. If they do, the engager will place the contractor on to their payroll and will deduct income tax and national insurance contributions (NICs) before paying the contractor. The engager will also have to pay employer NICs on the contractor’s pay, which is currently 13.8%.
IR35 within the private sector
From April 2020, the rules are due to change for contractors working with medium- to large-sized clients within the private sector. Like the public sector, these clients will have to determine whether the contractor falls inside or outside IR35. Where it is determined that the contractor falls inside IR35, the business, agency or third party paying the contractor’s company will need to deduct income tax and employee NICs and also pay employer NICs.
The existing IR35 rules will continue to apply to small businesses, and companies will continue to self assess as to whether IR35 applies to each engagement.
HMRC has developed the Check Employment Status for Tax (CEST) service to help businesses determine whether the off-payroll working rules apply. You should use CEST https://www.gov.uk/guidance/check-employment-status-for-tax to check whether you’re employed or self-employed for tax purposes. If you are in doubt about whether your engagement is of employment or self-employment, you may ask for an opinion from HMRC.