Contents

• Introduction
• What is IR35? And how does it work?
• What does it mean to be inside or outside IR35?
• How has IR35 changed?
• End clients – How to stay compliant
• Contractors – How to stay compliant
• Useful tools
• FAQS
• Summary

Introduction

The landmark update to off-payroll working rules, commonly known as IR35, in April 2021 had substantial ramifications for the private sector.

The changes brought in by the UK government mirrored the changes in April 2017 in which the IR35 status was no longer decided by the contractor, but was decided by the public sector. The change in April 2021 means that the IR35 status is now no longer decided by the contractors working in the private sector, but by their clients instead.

There was hope that these changes would be reversed as indicated by the Mini Budget of September 2022, in which the government announced fundamental changes to the IR35 legislation. This never came to fruition and Jeremy Hunt on breakfast news announced they would be staying.

However, these proposed changes were cut when on 17 October 2022, the then UK Chancellor announced that the IR35 changes in April 2017 and April 2021 would be staying.

A big part of the challenge in dealing with IR35 is the complexity of the updated legislation and making sure every base is covered throughout the supply chain. This is reflected in the data, particularly a national study led by management consultancy Sullivan & Stanley which revealed just over half (52%) of businesses found the changes to IR35 legislation to be ‘contradictory or confusing’.

At Gerald Edelman, we’re often asked by clients to help explain IR35 in plain terms and to ensure they stay compliant with the law. That’s why we’ve put together this short guide to cover the key points that both companies and contractors need to know. We hope it proves valuable for your planning.

What is IR35? And how does it work?

IR35 legislation was introduced back in 2000 under the Finance Act in an effort by HMRC to combat “disguised employment”.

This is a term used to describe workers who are providing their services to end clients through intermediaries, such as a PSC, but who operate in a manner more akin to an employee.

The off-payroll working rules, commonly referred to as IR35, aims to ensure that these workers pay the correct amount of tax and National Insurance contributions on an assignment.

Who does IR35 apply too?

• Contractors working through intermediaries such as personal service companies (PSCs).
• Medium and large-sized businesses hiring contractors via intermediaries.
• Entities in the contractual chain paying the PSC.

Who is exempt from IR35 legislation?

• Small businesses defined by HMRC. Please note for accounting periods beginning on or after 1 April 2025, to qualify as a “small company,” at least two of the following criteria must be met:
  • Annual turnover: Not more than £15 million (up from £10.2 million).
  • Balance sheet total: Not more than £7.5 million (up from £5.1 million).
  • Number of employees: 50 or fewer (unchanged).
• Sole traders (not operating through a PSC or intermediary).
• End clients located wholly overseas.

What does it mean to be inside or outside IR35?

If a contractor’s employment status is deemed to be “inside IR35” – meaning their working arrangement is akin to that of employment – the party who pays the contractor’s PSC becomes responsible for deducting Income Tax and National Insurance contributions before they pay the PSC. However, if the working arrangement is determined to be “outside IR35”, the PSC can be paid gross, and the contractor remains responsible for managing their own tax liabilities.

How has IR35 changed?

Private sector reforms

One of the most significant updates to IR35 was the reform of the off-payroll working rules. These reforms were first applied to the public sector in 2017 and then extended to the private sector in April 2021. Under these changes, the responsibility for determining a contractor’s IR35 status moved from the contractor to the end client or recruitment agency. As such, businesses and agencies are now required to assess whether an engagement is considered to be “inside” or “outside” IR35.

Navigating IR35 rules compliantly

If deemed to be “inside” IR35, the end client or agency must then deduct Income Tax and National Insurance contributions at source, just as they would for an employee. For contractors, this reduces take-home pay, while for recruitment agencies, it adds an administrative burden and increases the risk of penalties for incorrect determinations. The changes have made compliance more challenging, highlighting the need for thorough status assessments and careful contractual arrangements between contractors, agencies, and end clients.

End clients – How to stay compliant

Best practices

To navigate IR35 effectively, end clients must adopt a series of best practices that prioritise compliance and ensure all their supply chain responsibilities are met. As such, end clients are required to:

• Conduct thorough employment status determinations considering factors such as control, substitution, and mutuality of obligation.
• Implement a standardised process for determining IR35 status.
• Document assessments clearly, providing contractors and recruitment agencies with a Status Determination Statement (SDS) that outlines the reasoning behind the status decision.
• Perform regular audits and reviews of working practices.
• Establish robust internal policies and train relevant staff to stay updated on IR35 rules.

Reasonable care

End clients are required to exercise ‘reasonable care’ when determining IR35 status. In circumstances where a client has utilised reasonable care, but the outcome of the assessment is determined by HMRC to be incorrect, the end client will not be liable.

Where an incorrect assessment has been made, the liability then shifts to the fee-payer—the entity paying the PSC. If there is a recruitment agency in the contractual chain, the agency will be the fee-payer. However, if the client engages the PSC directly, then in this circumstance the client will be the fee-payer.

Contractors – How to stay compliant

For contractors, ensuring compliance with IR35 legislation is essential to avoid penalties and unexpected tax liabilities. The first step is conducting a thorough assessment of your employment status, focusing on key factors like supervision, direction and control (SDC), substitution, and mutuality of obligation (MOO). These factors determine whether you are genuinely self-employed or working in a way more akin to that of employee. Contractors should also ensure that their contracts accurately reflect their working relationship and avoid any clauses that suggest employee-like behaviour, such as fixed hours or lack of autonomy.

Useful tools

• https://www.gov.uk/guidance/check-employment-status-for-tax
• https://www.contractorcalculator.co.uk/ir35calculator.aspx
• https://www.uktaxcalculators.co.uk/ir35/calculator/
• https://www.gov.uk/guidance/ir35-what-to-do-if-it-applies

FAQs

Does IR35 apply to small companies?

IR35 rules do not apply to small companies. This means that contractors engaged by small companies, the responsibility for determining employment status remains with the contractor’s company.

For accounting periods beginning on or after 1 April 2025, to qualify as a “small company,” at least two of the following criteria must be met:

• Annual turnover: Not more than £15 million (up from £10.2 million).
• Balance sheet total: Not more than £7.5 million (up from £5.1 million).
• Number of employees: 50 or fewer (unchanged).

Does IR35 apply to sole traders?

The IR35 rules are only applicable to limited companies. However, the regulations around employment status are particularly relevant to sole traders who provide services to clients.

Does IR35 apply to foreign companies?

Where a contractor has an end client based overseas, which has no UK connection, such as a UK branch or office, the new IR35 reforms will not apply and the determining employment status remains with the contractors company.

If the end-client based overseas has a UK connection, such as a branch or office, it will still be the responsibility of the end client to determine status and issue a status determination statement. The overseas client will therefore be liable for the tax and NIC’s if it fails to meet its responsibilities under new rules and HMRC will collect this debt through the UK connection.

Does IR35 apply to workers outside the UK?

IR35 does not apply when you have no liability to tax or National Insurance contributions in the UK. Therefore, if you are a contractor based overseas and you qualify as a non-UK resident via the Statutory Residence Test, the IR35 legislation does not apply.

Do I need a limited company to work outside IR35?

A limited company can work outside IR35 if the end client has confirmed that the contract is not subject to IR35. Inside IR35 means that the contractor is regarded as an employee for tax purposes, while outside IR35 means that they are considered a true contractor and can continue as they are.

Do I still pay Corporation Tax if inside IR35?

If you work inside IR35 on one but not all of your contracts in a year, your business will still need to settle its annual Corporation Tax bill, along with quarterly VAT returns. However, given inside IR35 income is deemed a legitimate business expense, it will reduce your Corporation Tax bill. If you’ve only ever worked on contracts which fall inside of IR35, there may not be any Corporation Tax to pay. However, for those contractors who have worked on contracts which have been deemed to fall outside of IR35 prior to the implementation of the off-payroll reform, there is likely to be some Corporation Tax to pay.

Will IR35 be scrapped?

A repeal of the IR35 reforms now seem highly unlikely following the announcement by Jermey Hunt in October 2022 that the reforms would be staying.

Do you need support managing IR35?

As a specialist tax adviser, Gerald Edelman often works closely with companies, contractors and PSCs looking to stay compliant with the IR35 rules.

Our advisers are here to help weigh up your options and pinpoint a tax-efficient solution with your best interests in mind. We also help medium and large-sized companies conduct in-depth reviews of contractor arrangements across each and every step of their supply chain.

If you require more advice on IR35, or would like to discuss your own tax status as a contractor or end client, feel free to get in touch with Amal Shah or Rhys Thomas to arrange a complimentary consultation today.