IR35

Previously, contractors working through their personal service companies were responsible for determining whether their contracts fell inside or outside of IR35. However, as of April 6th, 2021, this responsibility now lies with the end client. Clients must assess the working practices of each contractor to determine whether they are inside or outside of IR35.

If a contractor's working arrangement resembles that of an employee of the end client, the client may determine that the contractor falls inside IR35. Conversely, if the contractor operates independently like a consultant, the client may determine that they fall outside of IR35. If a contractor is deemed to be inside IR35, the fee payer – the entity paying the contractor's personal service company – is required to deduct employment status income tax and national insurance as if the contractor were an employee.

For the past two decades, contractors operating through their personal services companies have been responsible for determining whether their work falls inside or outside of IR35. If a contractor deemed their work to be outside IR35, they were taxed as a business through their personal services company rather than as an employee.

However, as of April 6th, 2021, the responsibility for determining IR35 status shifts to the client. The client must assess the contractor's day-to-day working practices to make this determination. If the client determines that the contractor's work resembles that of an employee, they may fall inside IR35. Conversely, if the contractor's work resembles that of an independent consultant, they may fall outside IR35. 

This status determination must be communicated to all other entities in the contract chain, including the contractor, any recruitment business involved, and any entity paying fees to the contractor's personal services company. If the client determines that the contractor falls inside IR35, the fee payer must deduct employment status income tax and national insurance before paying the contractor's personal services company. As a result, the contractor will receive payment net of income tax and national insurance deductions.

On February 27th, 2020, the Government issued new guidance notes regarding IR35. According to these guidelines, contractors operating through their personal services companies and working for international clients located entirely outside of the UK are not subject to the off-payroll revisions.

Starting April 6th, 2021, clients are responsible for determining whether a contractor falls inside or outside of IR35. This determination requires a thorough review of each contractor's working arrangements.

Case law dating back to 2000 suggests considering various aspects of working arrangements when making this determination. To be deemed outside of IR35, the following criteria may apply:

• Absence of an ongoing obligation for the client to offer work, and for the contractor to accept it (known as the mutuality of obligation test).
• Contractor not under client's supervision or control, with autonomy over when, how, and where they work.
• Contractor's right to substitution unrestricted, indicating they are not personally required to provide services.
• Payment based on completed tasks, projects, or milestones, without entitlement to overtime or benefits.
• For a determination of inside IR35, the following factors may apply:
• -       Client directs and supervises contractor's work.
• -       Substitution requires client's express consent.
• -       Client obligated to pay fees for all hours or days worked.
• -       Contractor assumes no financial risk, being paid regardless of performance issues.