Understanding IR35 Legislation
IR35 (Intermediaries Legislation) aims to combat tax avoidance by workers supplying services through intermediaries (like limited companies) who would otherwise be employees. This comprehensive guide explains the current rules, how to determine your status, and steps to ensure compliance whether you're a contractor or business engaging contractors.
1. Key IR35 Concepts
Fundamental aspects of IR35:
- Deemed employment: When a contractor is effectively an employee for tax purposes
- Inside vs outside IR35: Whether the rules apply to an engagement
- Status Determination Statements (SDS): Required documentation from clients
- Public vs private sector: Different rules apply until April 2023 alignment
The legislation looks beyond the contract terms to examine the actual working practices. HMRC may challenge your status years later, making proper documentation essential.
2. Determining Employment Status
HMRC uses three main tests to assess employment status:
- Control: Who decides what, how, when and where work is done?
- Substitution: Can the worker send someone else to do the work?
- Mutuality of Obligation (MOO): Is there an ongoing expectation of work?
Additional factors considered include:
- Financial risk and investment
- Equipment and premises
- Benefits and exclusivity
- Length of engagement
- Integration into the client's business
3. Private Sector Rules (Since April 2021)
Key changes for medium/large private sector clients:
- Client (not contractor) now determines IR35 status
- Client must provide Status Determination Statement (SDS)
- Fee-payer (often agency) deducts tax/NICs if inside IR35
- Small businesses exemption still places responsibility on contractor
A business qualifies as "small" if it meets 2+ of: turnover ≤£10.2m, balance sheet ≤£5.1m, employees ≤50.
4. Compliance Steps for Contractors
To protect yourself as a contractor:
- Review all contracts and working practices
- Request SDS from clients for each engagement
- Use HMRC's CEST tool (with caution) for initial assessments
- Maintain evidence of business operations (website, insurance, etc.)
- Consider professional status reviews for borderline cases
- Diversify clients to demonstrate business risk
- Keep detailed records of all determinations
5. Compliance Steps for Businesses
If you engage contractors:
- Implement robust status determination processes
- Train HR and hiring managers on IR35 risks
- Document SDS for all contractor engagements
- Establish appeal processes for disputed determinations
- Review payroll processes for inside-IR35 payments
- Consider insurance against HMRC investigations
- Audit current contractor population for compliance