What is IR35?

If you’re self-employed through your own Limited Company, you must understand IR35 (off-payroll) legislation to ensure you’re always acting compliantly. At first, this can seem complicated, but don’t worry – our IR35 experts are here to help.

In 2000, the UK Government introduced the ‘Intermediaries Legislation’, known as “IR35” to regulate payments made in connection with services provided through an intermediary (such as a personal service company). This regulation instructed contractors to assess their employment status when taking on a new assignment to establish whether they’re legitimately working as self-employed or if their working practices would be considered employee-like if they were to remove their limited company as an intermediary. These requirements were subsequently included in Chapter 8 of ITEPA (sometimes referred to as the “old” IR35 rules).

In 2017, ITEPA was updated to introduce a new Chapter 10, directed at the public sector only, shifting the responsibility for determining a contractor’s employment status on each assignment from the worker to the end client.

In April 2021, Chapter 10 of ITEPA was updated again to incorporate private sector end clients, following the same exemptions as the public sector. (This is what has been referred to recently as the IR35 reforms or the “new” IR35).

Since April, the end client is required to conduct an IR35 assessment and issue a Status Determination Statement (SDS) to you and your employment agency. This will determine whether you are ‘inside’ or ‘outside’ IR35 and therefore whether you can compliantly operate through your PSC as legitimately self-employed.

If your end-client issues an ‘inside’ IR35 SDS, then your agency (and any other agencies in the supply chain) must ensure you are paid via PAYE and taxed as a normal employee (e.g. via a compliant Umbrella company like Workwell Umbrella ).

Or, if your end client issues an ‘outside’ IR35 SDS, then you can continue to work through your limited company as normal, claiming a mixture of salary and dividends to maximise your income.

The exemptions

Under this final (for now) iteration of the rules, the private sector end client has to determine status as in the public sector, unless one of two exemptions applies:

1) The end hirer is considered “small”
2) The end hirer is overseas

If the end hirer is exempt for either reason, the Chapter 8 rules apply, as before, and the contractor remains responsible for determining their employment status and paying tax correctly.

Please note: Although sometimes called the “old” and “new” rules, both Chapter 8 and Chapter 10 rules exist simultaneously as discreet pieces of legislation, meaning you either fall under one or the other depending on your end client’s size and location. If your end hirer is “small” or “overseas”, you are responsible for your SDS and tax payments under Chapter 8, otherwise, this falls to the agency/end hirer under Chapter 10.

If you are required to complete your own IR35 assessment, our market-leading assessment tool IR35 Complete™ can help you get an accurate, compliant status assessment without delay.

The Small Company Exemption

When is an end hirer “small”?

Your end hirer is considered “small” if they meet all these criteria:

• Annual turnover up to £10.2 million
• Assets listed on their balance sheet up to £5.1 million
• 50 employees or less

If this is the case, then Chapter 8 applies, and you (the contractor) are responsible for determining your employment status.

However, if your end hirer breaches even one of these criteria, they are no longer considered “small” and the liability for conducting and issuing your Status Determination Statement falls to the client and the recruitment agency under Chapter 10 of the legislation.

How to know if an end hirer is “small” 

We advise all contractors to ask your end client if they fall under the “small company exemption” before you start working with them since this will have a big impact on how both parties prepare for the role. Your end hirer must confirm their size (if you request it) in terms of whether they are or are not considered small under the off-payroll legislation.

If your end client doesn’t know if they’re considered “small” or won’t provide confirmation, this could be a warning sign that they’re not acting compliantly, so you must press for an answer to prove you’ve done your due diligence to HMRC. Under the off-payroll rules, an end hirer must respond to a request within 45 days.

It’s important to note that if you’re working for a small sub-company within a group of companies, it’s the group’s size that takes precedent, so the sub-company may not fall within the “small company exemption”, even if alone it would. And remember, it’s the size and location of your end client that matters – not your recruitment agency.

What if their size changes?

Since businesses aren’t static, your end client’s size may change while you’re working with them. HMRC has made allowances for this situation, stating within the rules that the company’s size is determined by the accounts they file in the previous tax year. Therefore, if a company grows or downsizes while you’re working with them, this change won’t impact the supply chain immediately. It would only apply at the beginning of the following tax year.

Therefore, it’s important to re-confirm the size of your end client before 5th April each year to ensure it hasn’t changed and the responsibility for conducting a status assessment hasn’t switched in either direction. If it has switched, we advise you to speak with your end client to ensure you both act compliantly.

The overseas exemption

What if your end hirer is “overseas”?

If your end hirer is overseas, then the IR35 reforms (Chapter 10) don’t apply since the end hirer is not governed by UK tax law. If this is the case, it is your responsibility as an individual with a UK tax residency, working through an intermediary (your own PSC) to conduct your own status assessment to ensure you pay the correct tax to HMRC.

How to know if your end hirer is “overseas”

Your end client falls into the “overseas exemption” providing they have no permanent UK connection, such as an office in the UK or a permanent employee living in the UK.

As soon as the end hirer makes a permanent UK connection, they are no longer considered an overseas company, so the liability for your SDS falls to them and Chapter 10 of the IR35 rules applies. Also, be aware that an overseas company that is in a group with a footprint in the UK is unlikely to qualify as “overseas” – HMRC would look to the UK group member to comply with the new rules, even if a different group company engaged the contractor.

Protecting yourself

When you’re self-employed, you must take all the necessary measures to act compliantly and pay the correct tax or you could face financial liability. This means you should always be aware of the size and location of your end hirer, so you know which set of regulations apply to your work. Every time your contract changes (whether you’ve got a new assignment or renewed terms of an existing contract) and at the beginning of a new tax year, you must confirm which party in the supply chain is responsible for conducting the SDS and verify your self-employment status to ensure you’re still acting compliantly.

If you’re acting under Chapter 8 (the status assessment is your responsibility) – you must have your own contract assessed with a reliable platform, such as IR35 Complete™. Our in-house assessment tool allows you to review existing assessments or conduct new IR35 assessments to ensure you’re always acting compliantly. Find out more.

If you’re acting under Chapter 10 (the status assessment and SDS is your client’s responsibility) – you may wish to conduct your own status assessment anyway to ensure you’re acting correctly, especially if you’re unsure of the size/location of your end hirer or you haven’t received an SDS. The best thing to do if you’re uncertain is to protect yourself by doing whatever you can to act compliantly – speak to our advisers to find out more.

Here to help

We understand this is a lot to take in and IR35 regulation can be extremely complicated. Don’t let this sway you from choosing self-employment. Our team are experts in IR35 legislation and compliance; we are happy to walk you through your requirements and give you tailored advice about the best solution for you so you can have peace of mind that all your compliance obligations are under control. Get in touch on 01923 257257 or click here to find out more about our IR35 services.