IR35 Guidance

1. What is IR35?

The IR35 rules are set out in sections 49 – 53 ITEPA. They provide that where an individual works through an intermediary but if that intermediary did not exist s/he would be treated as an employee for tax purposes, then the intermediary must deduct PAYE tax and NICs from the worker’s pay. In other words, they are “inside” IR35.

Where the contractual supply chain genuinely involves the engagement of an intermediary under the ownership and control of the worker, that intermediary is legally responsible for determining whether IR35 applies. The facts of each engagement determine whether IR35 applies and not any label, description or job title.

IR35 will apply if all the following statements are true:

  • the individual personally performs services for another person or business (the client) or is under an obligation to do so (see the cases for further detail)
  • the services are provided to the client through an intermediary such as a limited company or partnership which does not meet the definition of a MSC
  • the services are supplied as either an office-holder of the client or if the services had been provided directly to the client under a contract between the worker and the client, the worker’s employment status would be regarded as being that of an employee or office-holder of the client
  • the specific IR35 conditions of liability for the intermediary are met

2. Assessing IR35 status

The starting point is to consider the facts of the relationship between the client and the contractor in any proposed assignment.

Client:

othe type of work the individual will be doing,

owhether s/he will be an office-holder,

owhether or how s/he is to be supervised,

owill s/he be “part and parcel” of the client’s organisation?

Contractor:

owhether s/he works or has worked for other clients,

owhat financial risk does s/he take e.g. will s/he correct any defective work at no extra cost to the client?

ois s/he prepared to quote a fee for the work,

owill s/he will provide equipment or facilities to do the work,

owhat insurance s/he carries, and

owhether s/he expects to assign or sub-contract the work or supply substitutes (though clients may have an issue with this).

Importantly IR35 status must be considered on a case by case basis so the individual may work inside IR35 on some assignments and outside IR35 on others.

A new online test from 2017:

HMRC plans to introduce a new online test from 2017.

Getting an HMRC opinion on IR35 status:

HMRC can do a contract review for an individual for a specific engagement to help them establish their IR35 status. HMRC will require the relevant terms and conditions, documentation showing how the individual obtained the engagement, including any tender documentation submitted and any other relevant information. If HMRC concludes that an individual’s engagement is outside IR35 they will give him/ her a certificate with a unique reference number. The certificate will be valid for three years provided there is no change to circumstances for the duration of that engagement. Further information can be found on HMRC website.

Under IR35, when a worker living in the UK performs work for a client in the UK, the intermediary (limited company or partnership) is treated as having a place of business in the UK even if it’s incorporated or resident outside the UK. If an offshore intermediary fails to deduct and account for tax and National Insurance contributions due under the IR35 legislation, liability to pay tax and National Insurance contributions can be transferred to the: worker

  • onshore agency
  • end client

Action to recover employer’s National Insurance contributions not paid by an offshore intermediary could also include action against any of its assets located in the UK.

HMRC has powers to obtain details of payments to offshore intermediaries from the records of clients and agencies.

HMRC guidance on IR35 or the more detailed Employment Status Manual