Detailed guide: IR35 (intermediaries legislation): find out if it applies

Who’s affected by IR35

IR35 is also known as ‘intermediaries legislation’. It’s a set of rules that affect your tax and National Insurance contributions if you’re contracted to work for a client through an intermediary. You may need to follow IR35 if you work for a client through an intermediary.

The intermediary can be:

• your own limited company
• a service or personal service company
• a partnership

If IR35 applies then the intermediary has to operate PAYE and National Insurance contributions on any salary or wages it pays to you during the tax year.

The rules are designed to make sure that the right rate of tax and National Insurance is paid for you.

IR35 may also apply if you’re working through an intermediary and you:

• or your intermediary, or client are abroad
• work in the construction industry
• are an office-holder
• work with your partner or spouse
• are working, through an intermediary, for a charitable organisation

IR35 doesn’t apply if you work for a client through a Managed Service Company (MSC) or agency, for example an employment agency.

There’s more detailed information about the IR35 conditions of liability in the Employment Status manual.

Find out what you need to do if IR35 applies to you.

Penalties for not following IR35 rules

The intermediary is always responsible for complying with IR35 legislation when it applies. If you’re a director of your limited company or a member of your partnership, you must make sure all relevant legislation is followed, and take responsibility for deciding if it applies for each of your engagements or not.

If IR35 legislation applied to previous contracts that you worked on but wasn’t complied with, you should tell HM Revenue and Customs (HMRC) immediately. If you make a voluntary disclosure it may reduce any penalties you have to pay. Contact the IR35 Helpline for advice on making a disclosure.

There can be significant consequences if you, your intermediary, or client ignore IR35 legislation. Interest and penalties can be charged on any extra tax and National Insurance contributions that are owed. Penalties can be more severe if it can be proved that IR35 rules or legislation have been deliberately ignored.

Working out the worker and client relationship

When you’re deciding if IR35 applies to a contract it’s important to establish what the underlying relationship (your employment status) is between you (the worker) and the client for each contract or engagement.

There’s usually a contract between your intermediary and the client, either directly or through another party such as:

• a staffing agency
• a recruitment agency
• an employment business.

You have to use the facts of each contract or engagement to decide if IR35 applies, and not any label, description, or job title.

Work out your employment status for each contract by considering what that relationship would be if there wasn’t an intermediary involved.

Do this for each individual contract, and make sure you consider them again if they change.

Remember that there can be more than one agency in the chain to supply your services to a client.

If you use your own intermediary to provide a service

If you’re engaged by a client through your own intermediary, it’s the client’s responsibility to consider your employment status and make sure they meet their own tax and National Insurance liabilities.

There’s usually a contract between your intermediary and the client, either directly or through another party such as a staffing agency, a recruitment agency or an employment business. There can be more than one agency in the chain to supply your services to a client.

If all of the following apply then you need to follow IR35 legislation:

• you work for a client as a self-employed contractor, sole trader, freelancer, or consultant
• you could be considered an employee if the intermediary didn’t exist
• you pay yourself through your own limited company or partnership (sometimes called an ‘intermediary’ or ‘personal service company’) or you have a material interest in that company

There are some circumstances where the client may be responsible for operating your PAYE, such as if:

• the contract or working arrangement shows that you’re engaged directly by the client as an office-holder or employee, then the client will be responsible for operating PAYE for you
• a client contracts directly with you – the client will always be responsible for operating PAYE for you, even if payment for your services is made to your intermediary

There may be penalties if the client doesn’t operate PAYE where needed.

Using an agency or MSC to provide a service to a client

There’s different legislation to follow if you provide services to an employer or end client through a third party agency or MSC.

You have to comply with agency legislation rather than IR35 if you provide services to an employer through a third party agency and technically, you’re not a direct employee of either.

If the agency is based outside the UK the client may be liable to operate PAYE and make the appropriate deductions, returns and payments of tax and National Insurance contributions instead.

You need to follow MSC legislation rather than IR35 if you provide your services to end clients through an intermediary company which is controlled and run by a third party service provider.

If you work in the construction industry

Both the IR35 legislation and the Construction Industry Scheme (CIS) can apply if you’re a subcontractor working in the construction industry through a limited company or partnership.

For example, this can happen if you’d be considered as an employee of the client if there wasn’t a limited company or partnership acting as an intermediary.

To stop tax and National Insurance contributions being paid twice on the same earnings within the CIS and IR35 schemes special rules have to be applied.

IR35 if you, the intermediary, or client is abroad

The limited company or partnership is incorporated or resident abroad

Under IR35, when a worker living in the UK does work for a client in the UK, the intermediary is treated as having a place of business in the UK even if it’s incorporated or resident outside the UK.

If an offshore intermediary fails to deduct and account for tax and National Insurance due under IR35 legislation, liability to pay this can be transferred to the:

• worker
• onshore agency
• end client

Action to recover employer’s National Insurance contributions not paid by an offshore intermediary could also include action against any of its assets located in the UK.

HMRC has powers to obtain details of payments to offshore intermediaries from the records of clients and agencies.

If the client is non-UK resident

Deciding if IR35 applies depends on:

• the tax residence status of the worker and client
• where the duties of the contract are carried out

Foreign nationals

If you’re a foreign national who provides your services through an intermediary you may be affected by the IR35 legislation.

Further HMRC services to help you find out if IR35 legislation applies

IR35 Helpline

If you need help understanding and applying IR35, contact the IR35 Helpline. It’s confidential and any information you give won’t be shared with HMRC compliance teams. You don’t need to reveal your identity to use the helpline.

The Contract Review Service

If you want to be certain about your position you can use HMRC’s Contract Review Service. They will review a written contract for you, and if they decide that IR35 doesn’t apply to your contract, they’ll give you a confirmation letter with a unique reference number that will be valid for 3 years. If, later on, HMRC open an IR35 review, you can give them this number and they’ll suspend the review while they consider all the information. HMRC will close the IR35 review if:

• the contract reviewed is typical of your engagement terms and conditions
• the information provided is accurate
• evidence shows that circumstances haven’t changed

Contact the IR35 Helpline to get in touch with the Contract Review Service.

What the Contract Review Service can do

The Contract Review Service can only give advice on existing contracts. HMRC won’t usually give opinions to companies or partnerships on contracts for a particular tax year unless they have all the information they need before the 5 April of that tax year.

They will review the:

• facts, including looking at the relationship between the worker and client
• contract or contracts which establish the relationship

They may also want to talk to you and to others, including the client.

Information the Contract Review Service will need

If you don’t or can’t provide all the information, it may not be possible for HMRC to form an opinion.

HMRC will need to see copies of any contracts involved in the relationship. You should send copies of these contracts to the IR35 Customer Service Unit together with any other relevant information, such as:

• written statements from the worker and the client about their views of the working terms and conditions, with particular emphasis on what happens in practice
• details of how the engagement was obtained and the recruitment procedure, together with a copy of any adverts for the work in question
• a description of the nature of the services to be performed, together with any job or work specifications for the contract
• copies of any tenders made by the intermediary
• details of any additional contractual terms not included within the written contracts, whether oral, written, or implied
• details of how and who allocates the work and the role the worker plays in the client’s organisation any other documentation relating to the working terms and conditions
• other relevant information from the worker or intermediary – for example this might include:
  • the number of engagements held during the year
  • the number of different engagers
  • expenditure on equipment necessary for the performance of the contract

You should also provide the:

• worker’s National Insurance number
• company’s HMRC reference number
• company’s postcode

If you can’t get a copy of a written contract, for example a contract between an agency and the client, it’s essential that there’s some evidence from the client about the terms and conditions of work. HMRC can help you if you have a problem obtaining contracts.

In some cases HMRC may not have enough information to give an opinion and in others their opinion may have to be heavily qualified. But you can rely on it so long as you’ve supplied all the relevant information and there’s evidence that the terms of the engagement don’t change part way through.

For advice on using the Contract Review Service contact the IR35 Helpline.

If you disagree with HMRC’s opinion

If you don’t agree with an opinion of the IR35 Contract Review Service and it can’t be resolved quickly, it will be passed to the local HMRC IR35 inspector. This will only be done with your full permission. They’ll reconsider the opinion given and, where necessary, seek additional evidence from the worker and/or the client.

If there’s enough evidence to support an opinion and you disagree with that opinion, you have a right of appeal and can ask for an appealable decision.