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IR35 – Off- payroll working rules

Employment Matters e-update – March 2021


Businesses in the private sector have traditionally been able to engage contractors providing their services through personal service companies (or other intermediaries) without having to consider the contractor’s status for tax purposes. Under the upcoming changes to IR35, large and medium-sized private-sector businesses will be required to give careful consideration to the tax status of their contractors. The reforms will switch the responsibility for determining a contractor’s status and, if appropriate, operating PAYE and National Insurance contributions (NICs) from the personal service company to the ‘fee-payer’.

Application of IR35

The IR35 regime applies in circumstances where the client; that is the end user organisation engages a worker via an intermediary, such as a personal service company (PSC) or partnership, and where the individual worker would otherwise:

  • for income tax purposes, be regarded as an employee or an office-holder of the client, or
  • for National Insurance contributions (NICs) purposes be regarded as employed in employed earner’s employment by the end client.

What is an intermediary?

The legislation, the Social Security Contributions (Intermediaries) Regulations 2000, defines an intermediary in section 5, ‘any person, including a partnership or unincorporated association of which the worker is a member’ which also satisfies other conditions which are laid out in the same section.

Of those other conditions, importantly the worker requires to have a ‘material interest’ in the intermediary (i.e. hold beneficial ownership) or the payment of benefit must be received (or receivable) by the worker directly from the intermediary, and can reasonably be taken to represent remuneration for services provided by the worker to the client.

The effect of the IR35 regime, in relation to public authorities, and soon to be extended to private organisations, is to impose the obligation to assess whether IR35 applies, and in the event it does apply, shift the obligation to make deductions in respect of income tax and NICs onto the party that is closest in the relevant contractual chain to the PSC or other intermediary. In the most straight forward of cases this will be the end client, but in more complicated contractual arrangements, there may be another intervening intermediary (such as an agency) on to whom this responsibility will fall.

Arrangements between intermediary and client

In short, the IR35 regime will apply where a contract of employment would have existed between the workers and the end user, had there been no intermediary. Essentially, IR35 is based on the fiction that there is a contract directly between the end user and the worker – the notional or hypothetical contract.

Guidance has been published, and below is a list of indicators that, if contained within the contract between the end user and the intermediary, would suggest that the notional contract would be one for the provision of services on a self-employed basis, and therefore out with the scope of IR35. Importantly however, while the below are helpful indicators, each case will turn on its own facts.

Potential indicators of self-employment status include:

  • A clause stating that the contract is for the supply of services by the intermediary, not for the supply of an individual worker
  • A genuine substitution clause, giving the intermediary the right to send someone else in the worker’s place. In these circumstances the substitute should be paid by the intermediary, not directly by the end user and the end user should not have a right of prior approval over the worker’s replacement, provided they are sufficiently skilled
  • A clause allowing the intermediary to hire others to help the worker carry out the task
  • A clause stating that the work is to be carried out for a fixed price (so that the intermediary that bears the risk of loss if the worker takes longer, and the opportunity to profit if the job takes longer.
  • A clause requiring defective work to be remedied by the intermediary with no further charge to the end client

HMRC enquiries

HMRC enquiries are likely to focus on the facts of the relationship between the end user and the individual worker, looking in particular at:

  • The degree of control exercised by the client over the work done by the individual – the greater the extent of the day to day control exercised by the client over the nature, timing and quality of the work provided by the individual, the more likely it is that HMRC will see the nature of the relationship as being one of employment
  • Whether any equipment used by the individual is supplied by the intermediary or by the end user – if all or most of the equipment is provided by the end user, and particularly if there is a restriction in place preventing the individual using equipment supplied by the intermediary, HMRC is likely to see this as an indication that IR35 rules should apply
  • The degree of integration of the individual into the end user’s organisation. If the individual is listed as part of the organisation, or has management responsibilities for members of the end user’s workforce, HMRC will likely see this as an indication of employed status, and therefore the IR35 rules will apply
  • Whether in practice, the individual can send a substitute in their place if they are unable or unwilling to work on any given day or period of time. An inability to send a substitute would be an indication of employed status and therefore IR35 will apply. If such a right is not only envisaged as part of the arrangement, but has actually taken place during the course of the contract, it is a strong indicator that the relationship is not one of employment
  • Where any payment has been made, or employee-type benefits provided directly from the client to the individual (i.e. being allowed to participate in a group pension plan), this will be indicative of employed status.
  • Whether there exists a mutuality of obligation on the parties – i.e. is there an obligation on both parties to do something for the other. This is a difficult concept, and has been heavily contested. If there is mutuality, this is indicative of employee status. The existence of a notice period for example, suggests a mutuality of obligation.
  • Financial risk – if a worker does not have to rectify poor quality work/services at their own cost, they are likely to fall within the scope of IR35
  • In particular, HMRC will want to know whether the individual has previously been employed directly by the client to carry out similar work with a similar level of responsibility.
  • IR35 may still apply irrespective of how many clients/assignments a worker is working on. There is however an argument that where a worker is engaged on multiple projects for various clients, it may be possible to demonstrate that the worker is in business of their own account as an independent contractor, and therefore fall out with IR35.

Of the above, the most critical elements on which HMRC will focus most heavily are: 1) the requirement for personal service/the right to substitution, 2) supervision/direction/control and 3) mutuality of obligation.


HMRC has created and released an online tool, the Check Employment Status for Tax Tool (known as CEST) which gives HMRC’s view on whether IR35 applies to a particular engagement. HMRC have advised that they will stand behind the results of this test, so long as the information provided is accurate. Therefore, it is recommended that this test is carried out in relation to all workers who pose a risk of falling within the scope of IR35. Although the service is anonymous, it is possible to print out a copy of the results together with HMRC’s response, and we would recommend that this print out is retained alongside other relevant tax records for future auditing purposes.


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