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An Employer’s Guide to IR35 Rules in the Private Sector

An employer’s guide to IR35 in the private sector

What is IR35? IR35 rules explained

IR35 and pretty much anything tax-related can be confusing. However, it’s important for any employer to get their head around – particularly if you utilise off-payroll workers.

But fear not! Our guide to IR35 in the private sector should answer your questions and have you feeling a little clearer when it comes to the rules and legislation.

What Is IR35 & How Does IR35 Work?

IR35 is a tax legislation designed to identify ‘disguised employees’ in the workplace. ‘Disguised employees’ are off-payroll workers who behave like and are treated like employees but are not on the company payroll. Therefore, they are unlikely to pay the same tax and insurance contributions.

IR35 rules apply to off-payroll workers who are self-employed and operating under a Personal Service Company (PSC) i.e. a limited company that they own and control. It does not apply to sole traders or PAYE agency workers.

When Did IR35 Come Into Effect?

The IR35 came into effect for medium and large companies in the private sector in April 2021. It was the biggest change we had seen made to employment tax for decades. It was, and still is, a big talking point. From April 2021, end users – ie the businesses benefitting from the services provided by the contractors – have been responsible and liable for ensuring contractors pay the correct level of tax and national insurance.

Prior to the IR35 coming into effect, businesses in the private sector were able to use contractors using personal services companies without needing to consider their tax implications and their status for tax purposes. The contractors themselves had full control over their tax contributions.

What Does ‘Inside IR35’ Mean?

You may hear the terminology ‘inside IR35’ and ‘outside IR35’ used quite often in relation to this topic. To be ‘inside IR35’, an off-payroll worker would essentially be working the same way an employee would be. Therefore they should be paying broadly the same tax and National Insurance contributions as employees. The service that these workers provide is deemed by HMRC to reflect service of employment rather than self-employment hence why the tax and National Insurance should align.

What Does ‘Outside’ IR35 Mean?

To be ‘outside IR35’ means that an off-payroll worker is operating independently as a business – and not being treated in a similar way to employees – and therefore, falls outside of the IR35 rules. In this instance, HMRC would deem their service as self-employed. Therefore, tax and National Insurance contributions would not be expected to be similar to those of employees.

Watch our IR35 webinar here to find out more.

Does IR35 Affect My Business?

According to, IR35 applies to your business if you meet two or more of the following conditions:

  1. An annual turnover of more than £10.2 million
  2. A balance sheet total of more than £5.1 million
  3. More than 50 employees

The off-payroll working rules also apply to:

  1. Third-sector organisations such as some charities
  2. Subsidiaries if the parent or the group is a medium or large business
  3. Connected and associated companies

Does IR35 Affect Small Companies?

No, IR35 does not affect small businesses of any type. If a small business is engaging contract workers through an intermediary, it is the intermediary in question who is responsible for applying the IR35 rules.

What does IR35 Mean For An Employer That Utilises Off-Payroll Workers?

Until April 2021, off-payroll workers were still able to determine their status and therefore control their tax and national insurance contributions. Since April 2021, the responsibility for determining whether off-payroll workers are inside IR35 or outside IR35 has shifted to the end client i.e. the end-user of the services.

If an off-payroll worker is determined by the end client to be inside IR35, the fee payer will be responsible for ensuring that the correct amount of tax and national insurance is deducted from the off-payroll worker’s pay at source. The fee payer is the company that has a direct relationship with the contractor. This could be the client or an agency of the client.

There are a number of factors to consider when determining whether your off-payroll workers are inside IR35 or outside IR35. These include:

  • Mutuality of obligation – are you are obliged to provide additional work for your off-payroll workers outside of the original project? Are they obliged to accept the work?
  • Substitution – can a substitute can be sent in the off-payroll worker’s place?
  • Supervision and control – can off-payroll workers work to their own time and actions or are they under your control on a daily basis?
  • Part and parcel – are off-payroll workers embedded in your workforce? For example, do they have line management responsibilities?

Since April 2021, your business as the end client has been liable for:

  1. Making sure the correct determination is made and reasonable care is taken
  2. Providing a written determination advising as to how the decision has been reached before the assignment commences
  3. Responding to disputes over IR35 status determinations

This presents a significant risk to your business if you have not put in place processes to enable you to make the correct determinations, ensure working practices are aligned and that all tax and national insurance is collected.

If your business is also the fee payer, you will also be liable for ensuring the correct amount of tax and national insurance is deducted from your off-payroll workers.

“An HR-recruitment power house with a big edge in financial services.  Fairness, Transparency and Openness are the top three tenets of this very people-focussed staffing firm.  An excellent reputation too, dating back to 2004. ”  – Contractor UK on The Curve as Group’s win for Best Contractor Recruitment Agency at The Contracting Awards

IR35: What Now?

If you are a medium or large business that meets two or more of the conditions set out above, and you utilise off-payroll workers, it’s time to make sure your processes are compliant.

The first thing you need to do is audit your current off-payroll workforce. Determine on a case-by-case basis whether individual workers are inside IR35 or outside IR35.

Then you need to put compliant processes in place to ensure that your business:

  1. Can make the correct determinations on a case-by-case basis
  2. Has working practices that support your determinations
  3. Can process deductions and payments correctly for off-payroll workers deemed to be inside IR35 or outside IR35 if you have a direct relationship

IR35 can be a tricky subject to navigate, but we hope this article and our free resources and webinar can help you understand how it works. Got questions? We’d love to hear from you so we can help.

Contact us today via our website or give us a call on 01295 811 486.

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