What is IR35? A guide for the self-employed

• IR35 meaning
• IR35 rules tackle tax avoidance through off-payroll working
• How IR35 rules work in practice
• IR35 changes: what happened in April 2021?
• IR35 changes 2023 – no longer going ahead
• IR35 rules: am I compliant?
• Supervision, direction, control
• Substitution
• Mutuality of obligation (MOO)
• Other IR35 criteria
• Have you thought about business insurance?
• Can legal expenses insurance cover an IR35 investigation?

IR35 meaning

IR35 is another name for the off-payroll working rules. The term ‘IR35’ refers to the press release that originally announced the legislation in 1999.

Self-employed IR35 rules are designed to work out whether a contractor is someone who’s genuinely self-employed rather than a ‘disguised’ employee, for the purposes of paying tax.

That’s because contractors who set up and work through a limited company enjoy some tax efficiency. While they don’t usually get employee benefits (like holiday and sick pay), they have flexibility and control over their work.

Some contractors try to take advantage of this tax efficiency by appearing self-employed on the surface, when they’d actually be an employee were they not providing their services through their limited company. The off-payroll working rules are designed to tackle this, but they aren’t without their problems.

IR35 rules tackle tax avoidance through off-payroll working

When a contractor is a ‘disguised’ employee, they’re taking advantage of the tax efficiency of working through a limited company, but otherwise they should be classed as an employee.

Consider the example of an employee who quits their job, leaves on the Friday and starts back at the company in the same position on the Monday, but as a contractor working through their limited company. Has the arrangement changed in any material way?

‘Disguised’ arrangements benefit employers too, because they don’t have to pay employers’ National Insurance contributions (NICs) or give any employee benefits to contractors.

So self-employed IR35 rules tackle those arrangements by testing the contract itself, working out whether it’s ‘inside IR35’ or ‘outside IR35’:

• if your contract is inside IR35, it points towards employment. HMRC sees you as an employee and you face an income tax and National Insurance burden, just as employees do
• if your contract is outside IR35, it points towards self-employment, and you can enjoy the tax efficiency that self-employment brings (as well as all the associated risks)

IR35’s nuances mean that contractors can’t be expected to know the law inside out. Please only use this article as a guide – if you’re unsure about anything, seek professional advice.

IR35: HMRC has a patchy record

Many find the legislation complicated to understand. Even HMRC seems to struggle, as its record on fighting IR35 cases at tribunal is patchy.

In 2019, TV presenters Kaye Adams and Lorraine Kelly successfully challenged HMRC in separate cases, proving that they weren’t inside the rules.

This lack of clarity, along with ambiguity over employment status guidelines (including available employment rights if contractors are found inside IR35), is controversial.

How IR35 rules work in practice

When does IR35 apply?

HMRC says that when working out whether IR35 applies to a contract or engagement, “you must work out the employment status of the person providing their services.”

HMRC goes on to say that the off-payroll rules apply if the contractor “would be an employee if there was no intermediary”. The intermediary in many cases is the contractor’s limited company (often called a personal service company).

If you work on multiple contracts, it’s possible that some fall within off-payroll working rules and some don’t. This is because these rules are based on each contract.

Intermediary meaning: what is an intermediary?

IR35 is also known as the ‘intermediaries legislation’ because it applies to workers who provide their services through an intermediary, rather than working as an employee.

As mentioned, the intermediary will often be the contractor’s own limited company, or personal service company.

A personal service company is a limited company where the sole director, the contractor, owns most or all of the shares. The contractor then delivers services to clients.

But gov.uk says that there can be other intermediaries:

• a partnership
• another personal service company
• an individual

A contractor can provide their services directly to clients through their intermediary, or they might work through an agency or umbrella company.

What does IR35 status depend on?

IR35 status tests usually relate to supervision, direction and control. We go into more detail as part of our IR35 checklist below.

HMRC also has a tool to check employment status for tax called CEST that you can use to see whether IR35 applies to a contract, plus an IR35 helpline.

But in reality, IR35 status hinges on IR35 case law and employment legislation, itself reliant on decades worth of employment tests heard in UK courts.

Another problem is that CEST may not be entirely accurate, as it doesn’t take a key piece of case law (mutuality of obligation, or MOO) into account.

Who works out IR35 status?

Off-payroll working rules in the public sector

If you contract with a public authority, they’re responsible for working out whether you fall inside or outside of IR35. If you fall inside, the hirer, agency or other third party who pays you then needs to deduct tax and NICs and report them to HMRC.

Off-payroll working rules in the private sector

Off-payroll working rules in the private sector changed in April 2021.

If you contract with larger businesses, they’re responsible for working out your IR35 status. As above, the party who pays you then needs to deduct tax and NICs.

Smaller businesses are exempt, which means it remains your responsibility to determine your IR35 status when working for them.

End clients are classed as small businesses if they meet two of the following criteria, for two consecutive financial years:

• annual turnover of no more than £10.2 million
• balance sheet total of no more than £5.1 million
• no more than 50 employees

IR35 changes: what happened in April 2021?

After a delay, private sector IR35 changes were introduced in April 2021. These changes introduced public sector rules to the private sector, shifting responsibility for working out IR35 status from the contractor to the client.

April 2021’s IR35 changes mean that:

• medium-sized and large businesses are responsible for working out the contractor’s employment status, not the contractor
• contractors should be given the reasons behind the decision in a Status Determination Statement, and can dispute the decision if they disagree with it (public sector clients also now need to give contractors a Status Determination Statement)
• small businesses are exempt from the changes, so if a contractor works for a small client, the contractor will still be responsible for working out their employment status

End clients in both the private and public sector need to show they’ve taken reasonable care when working out IR35 status. If they haven’t, HMRC holds them responsible for getting things wrong. They also need to keep records relating to employment status determinations, including how they’ve made their decisions.

IR35 changes 2023 – no longer going ahead

A planned repeal of certain IR35 reforms is no longer happening in April 2023.

Chancellor Jeremy Hunt confirmed that changes wouldn’t go ahead in the Emergency Statement in November 2022. This scrapped the previous chancellor’s plans to abolish the reforms of 2017 and 2021.

The IR35 checklist below can help you get IR35 compliant. Check out our IR35 support hub for more guides and resources.

IR35 rules: am I compliant?

In general, IR35 won’t apply if the contract is for services rather than employment. To untangle that, you should see whether the contract specifically mentions these principles:

• supervision, direction, control – this relates to how much say your client has over how you complete your work. For example, if you have to work at certain times, this implies employment
• substitution – could you bring someone else in to complete the contract, or do you need to do the work yourself? If you can’t send someone else, you’re likely to be inside IR35
• mutuality of obligation (MOO) – is there an obligation on the employer’s end to offer work, and do you have to accept it? This is called mutuality of obligation, and if an element of it exists, the contract may fall inside IR35

The contract has to reflect your actual working practices – essentially, the clauses need to be genuine.

Supervision, direction, control

For a contract to fall outside IR35, contractors should have freedom over how they complete their work.

• a contract that specifies things like the time you can start and finish work, or the days you’re required to work, points towards employment
• a contract might also point towards employment if a client oversees your work excessively and gives guidance on how to complete it
• plus, if you’re not only providing your services for the agreed job but also working on different tasks as your client sees fit, the contract is likely to be inside IR35

Substitution

For a contract to fall outside IR35, you should be able to send a substitute to complete the work instead.

• does your client only want you, or services more broadly? An outside IR35 contract might state that someone else can provide their services to complete the work
• the clause has to be genuine – you should know which skilled contractors you would ask
• plus the contract can’t be so restrictive that you essentially need to do the work yourself

Mutuality of obligation (MOO)

This is an important clause in a contract, as it’s a key test when working out self-employed status. If the client is obliged to offer work (and pay you) and you’re obliged to take it, this demonstrates a contract of employment.

• in practice, this means a self-employed contract involves working on a project-by-project basis
• once you’ve completed a project, you’re under no obligation to work on further tasks (and the client is under no obligation to offer them)
• you should also consider whether you can work for other clients simultaneously. If that’s prohibited, it points towards employment

Other IR35 criteria

There’s more criteria to consider when working out IR35 status:

• equipment – HMRC often tries to argue that if equipment is provided by the client, and you don’t use your own, you’re a disguised employee
• financial risk – self-employed contractors usually take a degree of financial risk, like any other business. Are you responsible for errors made during the contract, and would you need to rectify them in your own time? There’s usually a requirement to have professional indemnity insurance
• the way you’re paid – self-employed people are paid on a project basis, which might mean when the work is completed or at particular project milestones
• ‘part and parcel’ of the organisation – if contractors become so ingrained that they become part of a company’s structure, with people reporting to them for example, this points to employment rather than self-employment
• exclusivity – do you work for other clients? Typically the self-employed can work for multiple clients at once
• intentions of the parties – the contract should make sure the relationship between contractor and client is one of supplier and customer, but this should be genuine. If HMRC found the actual intended relationship is more like an employee and employer, it’ll ignore the contract
• business ‘on your own account’ – essentially this determines whether you’re actually running your business as a business. If you have things like a business website, a dedicated office space, and even employees, you could be seen as operating a business and not offering your services in the same way as an employee

Make sure you clarify your relationship with the hirer before you start the contract by considering all of these principles.

Again, before you start working, you should seek expert IR35 advice.

Have you thought about business insurance?

Contractors should think about a comprehensive business insurance policy, including:

• business legal protection insurance – this can cover the legal expenses for things like employment tribunals and HMRC tax investigations, including a dispute about your compliance with IR35 regulations
• professional indemnity insurance – a key cover for contractors and those who give professional services to clients. It can protect you if you make a mistake in your work that causes a financial or professional loss for your client
• public liability insurance – this can protect you if a member of the public is injured or suffers a loss because of your business and makes a claim
• business contents insurance – this can cover the equipment your business relies on every day, like PCs and laptops

Can legal expenses insurance cover an IR35 investigation?

Tax legal protection covers costs and expenses for employer compliance disputes, including anything concerning IR35 legislation and regulations.

If you have legal expenses insurance as part of your Simply Business policy, you have access to a number of useful services through DAS Businesslaw (you’ll just need your voucher code found in your policy documents to register).

DAS has a legal advice helpline, available whether you’re facing a serious legal issue or just want to check something with an adviser. They also offer a range of legal templates and guides to help you with tax and contracts.

IR35 news

Over the years we’ve reported on the often confusing rules, reviews, and U-turns when it comes to IR35. Here’s a round-up of IR35 news and changes:

• Why HMRC’s IR35 report has been criticised
• Can IR35 be fixed? 6 recommendations from the House of Lords

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Do you find the IR35 rules too complex? Let us know about your experiences with IR35 in the comments below.