Off-Payroll Working (IR35)

We have created this Off-Payroll Working (IR35) Toolkit for Small Business and Sole Traders to help you navigate to the right place for information that you need

What is Off-Payroll Working (IR35)

IR35 is a set of tax laws which form part of the Finance Act. The first piece of legislation came into force in April 2000 and is properly known as the Intermediaries Legislation. IR35 takes its name from the original press released published by the then Inland Revenue (now HMRC) announcing its creation. The income tax element of the Intermediaries Legislation has subsequently been integrated into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), and the NICs element into the Social Security Contributions (Intermediaries) Regulations 2000.

The off-payroll working rules (IR35) can apply when someone is carrying out services for a client but is not employed by the entity receiving the services. Services are often carried out by the worker on a self employed basis, through a limited company or through a personal service company. The rules are in place to combat avoidance of Income Tax and National Insurance due by the worker and the entity engaging the worker.

Off-Payroll Working (IR35) seeks to identify whether a worker is in fact essentially working as a disguised employee, this is known as deemed employment. Deemed employment will incur Income Tax and National Insurance liability to bring the liability in line with an actual employee

Deciding if your contract should be classed as employment can be complex; and determination will give consideration to key aspects of the contract in question, tests such as:

• control the client has over when, where and how the worker completes the work,
• can the worker send a substitute worker to complete the work or must they carry out the work in person
• is there a mutuality of obligation, ie is the employer obliged to offer work and is the worker obligated to take it
• does the worker carry the risk of making a financial loss on carrying out the contract

You can use the Check Employment Status for Tax (CEST) tool on Gov.uk to find out if you, or a worker on a specific engagement, should be classed as employed or self-employed for tax purposes. You should keep a printout or screenshot of any results of the tool that you rely on in your determination

https://www.tax.service.gov.uk/check-employment-status-for-tax/disclaimer

You should also refer to the Employment Status Manual for guidance on specific occupations

https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm4000

When Off-Payroll Working (IR35) applies, payments made to the worker are known as the direct deemed payment and are treated as employment income, the same as wages would have been paid. This means Income Tax and employees National Insurance is deducted from that deemed salary. Then the entity engaging the services, which could be an agency or hirer, has to additionally pay their employer’s National Insurance and Apprenticeship Levy, these cannot lawfully be deducted from the contractors fees.

Here is the full guide on Gov.uk on how to calculate the deemed employment payment

https://www.gov.uk/guidance/how-to-calculate-the-deemed-employment-payment

All public authorities and medium and large-sized clients outside the public sector are responsible for deciding if the rules apply.

If a worker provides services to a small client outside the public sector, the worker or their intermediary is responsible for deciding the worker’s employment status and if the rules apply.

According to the UK’s Companies Act 2006, a small company is defined as one that does not have a turnover of more than £6.5million, a balance sheet total of more than £3.26 million and does not have more than 50 employees.

Full Gov.uk guidance on Off-payroll working (IR35)

https://www.gov.uk/topic/business-tax/ir35