Definition of IR35
IR35 is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name.
If a contractor is operating through an intermediary, such as a limited company, and, but for that intermediary, they would be an employee of their client, IR35 kicks in.
If the contractor’s contract is in the public sector, it’s up to the engager (the contractor’s client) to determine whether IR35 applies. If it does, the engager will place the contractor onto their payroll and will deduct income tax and National Insurance before paying the contractor.
If the contractor’s contract is in the private sector, IR35 requires the intermediary to make an extra payment to compensate for the additional tax and NI that HMRC would have received on an equivalent employee’s wages.
From April 2021, the rules are due to change for contractors working with medium to large sized clients in the private sector. Like the public sector, these clients will have to determine whether the contractor falls inside or outside IR35.
When IR35 legislation applies, a contract may be described as ‘within IR35’ or ‘caught by IR35’.
Whether a contractor is an employee in all but name may vary from client to client and from project to project. When determining this HMRC will look at the whole picture, but key factors are:
- Does the contractor have to carry out the work personally, rather than being able to send a substitute?
- Does the client have to provide the contractor with work, and/or does the contractor have to carry out any work that the client requests?
- Does the client have control over how, when and where the contractor carries out the work?
Answers of yes to these questions will indicate a quasi-employment relationship. You can also use CEST, which is HMRC’s online tool to help determine IR35.
Note that HMRC will look at what actually happens (or would happen) in practice, rather than the terms of the contract. HMRC will also look at other factors, such as whether the contractor has an office at the client’s site, an email address and/or job title indicating that they are part of the client’s business, and so forth.