Facts you need to know about IR35
Purpose. IR35 aligns the overall Income Tax and National Insurance position of workers who, but for their intermediary, would be employees for tax. Public sector reform applied from April 2017; private sector reform from April 2021 (with a small business exemption where the client is “small”).
What is disguised employment?
A “disguised employee” is paid via an intermediary but, considering the working practices, would be an employee if engaged directly by the client.
What is an intermediary?
- Your own limited company (PSC)
- A personal service company or other service company
- A partnership or another individual
What happens if you fall within IR35?
Where the contract is deemed “inside”, PAYE/NIC applies to the deemed direct payment. Under off-payroll working, the deemed employer/fee-payer deducts and pays tax/NIC to HMRC. If the small-business exemption applies, the PSC remains responsible for assessment and any deemed payment.
Major IR35 status factors
- Control – who decides what, how, when, where work is done?
- Substitution – genuine right to send a qualified substitute and be responsible for them?
- Mutuality of obligation – ongoing obligation to offer/accept work?
- Financial risk – exposure to rectification costs, warranties, uninsured risk?
- Termination/obligations – fixed notice like employment? obliged to accept all tasks?
- Equipment & integration – own tools/systems vs client’s; integrated into organisation?
- Intentions – contract and conduct reflect B2B, not employment?
- Employee-type benefits – holiday, sick pay, pension, staff perks suggest employment.
- Training & multiple clients – who funds training? can you serve multiple clients?
Status is a multi-factor assessment of actual working practices, not just contract wording.
Who decides status?
- Public sector + medium/large private sector: the client must issue a Status Determination Statement (SDS) with reasons. The fee-payer (often the agency) is usually the deemed employer that operates PAYE.
- Small private-sector clients: the PSC decides (original IR35) and may still use the 5% allowance (see below).
Use HMRC’s CEST tool to check employment status for tax and to evidence decisions.
5% allowance — when it applies
No 5% allowance is available where the off-payroll rules (client assessment/fee-payer PAYE) apply. The 5% allowance remains only where the PSC is responsible for applying IR35 (typically when the client is a small company under the Companies Act tests).
Mixed status (some contracts inside, others outside)
IR35 applies per engagement. You can have inside and outside contracts at the same time; each must be assessed separately.
Safeguarding measures
- Consider an independent contract review by an IR35 specialist.
- Ensure contracts reflect reality; align working practices with B2B delivery.
- Avoid blanket determinations; use CEST with accurate inputs and keep evidence.
HMRC resources
- Understanding off-payroll working (IR35)
- Deemed employer / fee-payer responsibilities
- CEST – Check Employment Status for Tax
Tax implications if you’re “inside”
Inside IR35 means PAYE/NIC (and Apprenticeship Levy if applicable) on the deemed payment. Expenses are restricted versus a typical outside-IR35 engagement. From 6 Apr 2024, HMRC can offset taxes already paid by the worker/PSC against any assessed PAYE on the fee-payer (to reduce double taxation).
IR35 reforms: where we are now
- Public sector: client assessment/fee-payer liability since April 2017.
- Private sector: extended to medium/large clients from April 2021; small clients remain exempt (PSC assesses).
- Not repealed in 2023: the proposed repeal was scrapped; off-payroll reforms remain in force.
- Set-off rule: effective 6 April 2024 (with retrospective scope to 2017 payments) to mitigate double taxation where non-compliance is found.