3 March 2022

What IR35 means for clients

What is IR35?

IR35 is highly complex tax legislation that came into effect in 2000, and has undergone significant iterations in the years since. It is designed to combat tax avoidance by workers who supply their services to clients via an intermediary, such as a limited company (PSC), but who would be an employee if the intermediary was not used. Such workers are called ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC).

In the Budget Statement in October 2018, the Government announced its intention to reform the legislation changes around Off Payroll Workers (also known as IR35) in the Private Sector – an extension to the changes implemented in the public sector in April 2017.

For clarity, ‘Off Payroll Workers’ simply means contingent workers (contractors and temps) – it is not something different to IR35. It applies to workers who operate through a Personal Services Company (PSC), also referred to as a Limited Company.


Which clients does IR35 affect?

It applies only to Medium and Large companies – small companies are exempt from the legislation.

A medium and large company is classified as having 2 or more of the following:

  • Turnover more than £10.2m
  • Balance sheet more than £5.1m
  • 50 or more employees


How do you determine IR35 status?

Determining IR35 status of a worker is up to the client.

The main criteria used for assessing IR35 status are:

  • Right to Substitute – what is the process around this? Who offers permission to substitute? Who pays the Substitute? These are all important points to consider when thinking about worker substitution.
  • Supervision, direction & control (SDC) – is the worker fully responsible for the delivery of the service and, as such, takes full responsibility? A detailed schedule of services, including tasks and timelines is a must for all in the supplier change.
  • Financial Risk – does the contract have financial penalties in place for late delivery or an incentive to deliver ahead of schedule? Are defects contracted to be fixed by the worker for a several years after delivery?
  • ‘Part & Parcel’ of the organisation – has the worker been in situ for some time i.e. a few years? Is the worker providing services which are likened to existing permanent employees?
  • Equipment – does the worker provide equipment in order to fulfil the deliverables noted within the contract?
  • Mutuality of Obligation (MOO) – for an employment relationship to exist, there must be an obligation on the client to provide work to the worker and an obligation on the worker to carry out the work.


What's next?

We'd also recommend that you consult your legal department or accountant before putting any contracts in place, but if you have any questions about what's best for your organisation or assignment, we will be happy to offer our view.

Need more info? Check out the government guidance here.


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