What is IR35?

IR35, also known as the “Intermediaries Legislation,” is a set of tax regulations in the United Kingdom that was introduced to combat tax avoidance by individuals who provide their services to clients through an intermediary, such as a limited company or a personal service company (PSC). The term “IR35” is derived from the Inland Revenue (now HM Revenue & Customs, or HMRC) press release that originally announced these rules in 1999.

The main purpose of IR35 is to determine whether a worker should be classified as an employee for tax purposes or as a self-employed contractor. If a worker is deemed to be “inside IR35,” it means they are considered an employee in the eyes of the tax authorities, and they are required to pay income tax and National Insurance contributions as if they were an employee. This can result in a higher tax liability for the individual.

Conversely, if a worker is deemed to be “outside IR35,” they are considered a genuine self-employed contractor, and they are subject to different tax rules, often resulting in lower tax liabilities.

IR35 status is determined by assessing various factors, including the nature of the working relationship, control over the work, substitution rights, and other indicators of whether the individual is operating as an independent contractor or more like an employee.

In April 2021, the rules around IR35 changed significantly in the private sector. Prior to this change, it was primarily the responsibility of the contractor to determine their IR35 status. However, the responsibility for determining IR35 status shifted to the client or the hiring organization in many cases. If the client determines that the worker is “inside IR35,” they are responsible for deducting the appropriate taxes and National Insurance contributions from the contractor’s payments.

It’s important for both contractors and clients to understand and comply with IR35 regulations to avoid potential legal and financial penalties. The rules and their interpretation can be complex, so many individuals and organizations seek legal and accounting advice to ensure compliance.