IR35 - Your Questions Answered

What is IR35?

The off-payroll working rules, commonly referred to as IR35 or ‘the intermediaries’ legislation’, were introduced in 2000. These rules are designed to ensure that workers who operate through intermediaries—such as Personal Service Companies (PSCs), Partnerships, or other similar entities—pay taxes similar to employees if their working practices resemble those of an employee.

What Has Changed?

From 6th April 2021, the responsibility for determining IR35 status shifted. The contractor no longer decides their own IR35 status. Instead, the end client (the business receiving the contractor’s services) is responsible for assessing whether the off-payroll working rules apply to the assignment.

What Do Clients Need to Do Differently?

Clients are now required to assess whether the off-payroll working rules apply to any contractor engagement before the assignment begins. For incumbent workers, the client must also provide a determination on whether the rules apply to the current assignment.

This determination must be provided in writing, including the rationale behind the decision. It must then be shared with all parties in the supply chain (e.g., the agency, umbrella company, and/or PSC). This written document is called the Status Determination Statement (SDS).

How Does Tax Liability Flow Down the Supply Chain?

Click here to view the attached illustration. This example provides an overview of the supply chain and how liability for taxes passes from one party to another, depending on whether an action is performed—or omitted—as required.

Do the IR35 Reforms Affect Every Organisation?

Do Small Companies Need to Consider the Off-Payroll Rules?

The off-payroll reforms do not apply to small companies as defined by the Companies Act 2006. A small company meets the following criteria:

Annual turnover: No more than £10.2 million
Balance sheet total: No more than £5.1 million
Number of employees: No more than 50

Unincorporated organisations with a turnover of less than £10.2 million are also exempt.

In these exempt cases, it is the PSC that is responsible for determining and applying the IR35 rules.

When a company changes its size within an accounting period, the off-payroll rules will apply from the start of the next tax year, regardless of whether the organisation is incorporated or unincorporated.

[Download Small Companies Exemption Guide (Size: 118 KB)]

What If I Have a Contractor Working Remotely in the UK, but the Client is Based Abroad?

Yes, the off-payroll rules still apply if the worker operates through a UK-based PSC, even if the client is located abroad. The contractor remains subject to UK tax regulations.

Are There Any Risks for Non-Compliance?

Yes. Non-compliance could result in significant penalties. If the rules are ignored or if reasonable care is not shown when making status determinations, your organisation may be fined by HMRC—potentially from the start of the assignment. Non-compliance could also risk losing key resources, impacting project delivery, and damaging your reputation, which could affect your ability to attract flexible talent in the future.

Contractor Engagement Options

What is a Personal Service Company (PSC)?

A Personal Service Company (PSC), also known as a Limited Company, is a business entity that employs the contractor or representative providing services to the client. The contractor must have a material interest in the company, owning or benefiting from more than 5% of the shares in the company. For partnerships, the contractor must be entitled to at least 60% of the profits.

What is an Umbrella Company?

An Umbrella Company is an intermediary that acts as an employer for contractors. The umbrella company collects fees for the contractor’s services, deducts employment costs (such as tax and National Insurance), and then pays the contractor after these deductions.

What Are the Engagement Options for Contractors If Their Assignment is Inside IR35?

If a contractor’s role is determined to be Inside IR35, they can engage in one of the following ways:

PAYE: The agency will make tax and National Insurance deductions directly from the contractor’s pay.
Umbrella Company: The agency will pay the umbrella company, which will then pay the contractor after necessary deductions.
PSC with Deductions: The agency works with a service provider to ensure that relevant deductions are made for the contractor’s PSC.

Does CBSbutler Legislate Which Umbrella Companies a Contractor Can Use?

CBSbutler works exclusively with FCSA-accredited umbrella companies and has an approved list of service providers who adhere to the highest standards of legal and tax compliance. Our providers include:

Paystream
Brookson
Giant

We’ve secured preferential rates for all contractors using these services.

Learn why compliance is crucial here

Key Indicators for Assessing Employment Status

Does Control Affect Status Determination?

Control is a crucial factor in IR35 status determination. If the client controls:

How the services are performed
Where the services are performed
The degree of supervision of the contractor

If the client has significant control over these aspects, the role is likely to be determined as Inside IR35. If the contractor has more control over how and when the services are delivered, it’s more likely to be Outside IR35.

Can a Lack of Substitution Put a Contractor Inside IR35?

If a contractor cannot provide a substitute for their services, it could indicate personal service—an important factor for determining Inside IR35. If a contractor runs a business, they would typically be expected to provide a substitute if they are unavailable.

What Is Mutuality of Obligation?

Mutuality of obligation refers to whether there’s an expectation from the client to offer further work beyond the original assignment and whether the contractor is obliged to accept it. If there is an obligation, this could indicate Inside IR35 status. If there is no such obligation, it leans towards Outside IR35.

Status Determination Statements

What is a Status Determination Statement (SDS)?

An SDS is a document that confirms the IR35 status of a contractor’s engagement and provides the rationale behind that decision. It is required for all off-payroll engagements.

Who Decides Whether IR35 Applies?

The end client is responsible for determining whether the off-payroll working rules apply and making the IR35 status decision.

Who Receives the SDS?

The SDS should be shared with all parties in the supply chain, including the contractor, agency, and any other relevant parties. The SDS must be provided before the work commences.

What Does 'In Scope' Mean?

If a role is in scope, it means the contractor is considered an employee for tax purposes, and the necessary employment taxes and National Insurance should be deducted.

What Is Reasonable Care?

Reasonable care means clients must take appropriate steps to ensure the IR35 status determination is accurate. This involves training managers, documenting processes, and avoiding blanket determinations.

What Happens If the SDS Isn’t Given?

Failure to provide an SDS could result in tax and NIC liabilities falling to the end client. If the client doesn’t meet their obligations or provides a determination without due care, HMRC may issue penalties.

Conclusion

Understanding and adhering to the IR35 rules is critical to maintaining compliance and avoiding risks. Properly assessing and documenting each contractor’s status ensures that your business stays within legal requirements while protecting the tax system from potential abuse.

If you need help navigating the IR35 rules or need advice on contractor engagements, don't hesitate to get in touch.