What Is Off-Payroll Working, and Why Do The Rules Exist?
Understanding IR35 Regulations for UK Contractors and Businesses
The off-payroll working rules (IR35) affect over 500,000 UK contractors and aim to prevent tax avoidance by ensuring workers pay similar taxes whether they’re employed or contracted through intermediaries.
What Is Off-Payroll Working?
Off-payroll working (commonly called IR35) refers to when workers provide services to clients through an intermediary like a limited company, rather than as direct employees.
Key Characteristics:
- Worker provides services through their own limited company (Personal Service Company)
- Client pays the company rather than employing the worker directly
- Worker takes income as dividends rather than salary (reducing tax/NI liability)
- Common in IT, engineering, finance, and other professional services
Why Do The Rules Exist?
HMRC introduced IR35 to combat “disguised employment” where workers effectively function as employees but avoid:
| Tax/NI Liability | Traditional Employee | Disguised Employee (Pre-IR35) |
|---|---|---|
| Income Tax | Paid through PAYE | Paid as dividends (lower rate) |
| Employee NI | 12% on earnings | 0% |
| Employer NI | 13.8% | 0% |
| Total Tax Difference | N/A | Up to 25% less |
How IR35 Rules Work
For Private Sector Clients (Medium/Large):
- Client determines employment status
- Client responsible for deducting correct tax/NI if rules apply
- Must provide Status Determination Statement (SDS)
For Public Sector Clients:
- Always responsible for determining status
- Must operate PAYE if rules apply
- Rules in place since 2017
For Small Private Sector Clients:
- Worker’s company determines status
- Worker’s company handles tax if rules apply
- Small company definition: <£10.2m turnover, <£5.1m balance sheet, <50 employees
Determining IR35 Status
HMRC uses three key tests to assess employment status: Control, Substitution, and Mutuality of Obligation (see below). No single factor is decisive – the overall working relationship is considered.
| Factor | Inside IR35 (Employee) | Outside IR35 (Genuine Contractor) |
|---|---|---|
| Control | Client dictates how, when and where work is done | Worker decides how to complete the work |
| Substitution | Cannot send someone else to do the work | Right to send a substitute worker |
| Mutuality of Obligation | Client must offer work, worker must accept | No obligation beyond current contract |
| Financial Risk | No investment in equipment/materials | Own equipment, liable for corrections |
| Benefits | Receives employee benefits | No sick pay, holiday pay, etc. |
Recent Changes and Compliance
Key Timeline:
- 2000: Original IR35 legislation introduced
- 2017: Rules changed for public sector
- 2021: Extended to medium/large private sector
- 2023: HMRC increased enforcement activity
Compliance Tips:
- Use HMRC’s CEST tool (but note limitations)
- Get professional contract reviews
- Keep detailed records of working practices
- Review status for each new contract
- Consider insurance against investigations
Considering Off-Payroll Working?
Our tax specialists can help you navigate IR35 regulations and ensure compliance.
Email: ir35@mhcandco.co.uk
Phone: +44 333 789 1010
Address: 54 Gloucester Road North, Bristol, BS7 0SJ, United Kingdom
Get IR35 Advice
Phone: +44 333 789 1010
Address: 54 Gloucester Road North, Bristol, BS7 0SJ, United Kingdom
Get IR35 Advice
