Understanding off-payroll working (IR35)
The Off-Payroll Working Rules, also known as IR35, are implemented to guarantee independent contractors are subject to the same Income Tax and National Insurance contributions as an employee would be.
The IR35 regulations apply to anyone who would have been considered an employee if their services were provided directly to a client.
Those affected by these rules include workers providing services through their intermediary, clients receiving services from a worker, and any agency supplying worker services.
These rules are subject to variation for those employed by smaller businesses compared to mid or large-sized businesses.
Who the rules apply to
These rules are applicable to three groups:
- a worker offering their services via their own intermediary to a client;
- a client acquiring services from a worker through an intermediary;
- and an agency or other provider offering a worker's services through their intermediary.
Depending on the size of the business, different regulations apply.
The client is the one who obtains the services of a worker and may also be referred to as the hirer, engager or end client.
A worker subject to these rules may present their services through a personal service company (PSC), a partnership, or another individual.
A PSC is a limited company, which a worker holds control and a share in, that enables them to render their services.
What happens if the rules apply
The party tasked with enacting the rules must decide whether a worker should be taxed as an employee or self-employed. The Check Employment Status for Tax (CEST) tool can assist with this.
Whether the worker is treated as employed or self-employed, the worker and the deemed employer must pay different taxes.
The off-payroll working rules should be applied on a contract-by-contract basis, as the worker may have some contracts subject to the rules and others not.
A contract for the off-payroll working rules includes any verbal, written or implied agreement between parties.
When the rules are applicable, the client should produce a Status Determination Statement (SDS) and the reasons for the decision.
In cases where the worker is treated as employed for tax purposes, the deemed employer must deduct Income Tax and Employee National Insurance Contributions from fees paid to the worker's intermediary.
Additionally, Employer National Insurance Contributions and the Apprenticeship Levy, if applicable, should be paid to HMRC by the deemed employer.
Get more help
You can get help on the off-payroll working rules (IR35) with webinars and resources from HMRC.
You can contact HMRC for help with enquiries about the off-payroll working rules or a full run-through of the check employment status for tax (CEST) tool.