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Understanding Off-Payroll Working or IR35 in the UK

February 20, 2021
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EDIT, April 2020: Due to the Coronavirus outbreak, IR35 has been pushed back to next year. We will keep this article updated as we learn more.

What is IR35 (Off-payroll working)?

IR35 is the abbreviation for the 'intermediaries legislation', a set of tax rules that apply to you if you work for a client through an intermediary – (a limited company or "personal service company" or as an independent contractor, which is how many people work).

If you fall into the legislation, you can expect to pay about 25% more in tax per year.

IR35 should not apply to you if you are a genuine independent contractor, freelancer, or consultant who has in their own business. To ensure this, you must take the time to understand how the legislation works, apply best practices to remove the risks and have a defense prepared in case of an investigation by HMRC.

The off-payroll working rules (IR35)

The off-payroll working rules can may if a worker performs their services through an intermediary. That will usually be the worker's own service company but can be a partnership, a managed service company, or an individual as well.

The rules ensure the workers, who would have been an employee if they were providing services directly to the client, pay broadly the same tax and National Insurance contributions as employees.

You may be affected by IR35 as:

  • a client who receives services from a person through (their) intermediary
  • a person who provides services through an intermediary
  • an agency providing a person's services through an intermediary

If the rules above apply, tax and National Insurance contributions must be deducted from workers' fees and paid to HMRC.

When the rules of IR35 apply

IR35 rules take effect on 6 April 2020 and are applied differently. From this date onward, all public authorities and medium and large-sized clients will be responsible for deciding the employment status of all their workers.

The IR35 rules apply if a worker provides services to a client through an intermediary, but would be considered as an employee if they were contracted directly.

Use this employment status for tax service to help you decide if the IR35 rules apply to you.

Before 6 April 2020

If you are a worker contracted by a client in the private sector, it's your intermediary's responsibility (or your own) to decide your own employment status for each contract you have.

From 6 April 2020

If a worker provides services to a small client (in the private sector), the worker's intermediary (or themselves) will be responsible for the decision regarding the worker's employment status.

When you need to start applying the rules of IR35

Clients in the private sector

If you meet the conditions listed above, you must start applying the rules when the changes come into effect on 6 April 2020.

If you use the simplified test to determine your size, you must apply the rules from the start of the tax year following the end of the calendar year when you met the conditions.

If you do not use the simplified test and do not meet the conditions on 6 April 2020, your circumstances may change later. If you then meet the conditions for two consecutive years, the date you need to apply the rules will be different. You must apply the rules from the start of the tax year following the end of the filing period for the second financial year when you met the conditions.

What to do as a client

You will need to decide on the employment status of a worker for every contract you have with an agency or worker. You'll need to:

  • pass your determination and the reasons for it to the worker and the person or organization you have a contract with
  • keep detailed records of your employment status determinations, including the reasons for them and paid fees
  • have a process in place for any disagreements that come up from your determination

If you are also the fee-payer and the off-payroll working rules apply, you will need to deduct and pay tax and National Insurance contributions to HMRC.

Small-sized clients in the private sector will not have to decide the employment status of their workers. This will remain the responsibility of the worker's intermediary.


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Who to inform about your determination

From 6 April 2020 onward, you must provide the worker and the agency or other organization you contract with your determination and the reasons for it. Do this regardless of your determination regarding the off-payroll working rules.

You will be responsible for tax and National Insurance contributions until you tell the worker about your determination.

A status determination statement issued before 6 April 2020 is valid under the new rules if it contains the reasons for the decision reached. If the working practices of the relationship change or you initiate a new contract with the worker, you need to ensure that the same rules still apply.

What to do when a worker disagrees with your determination

A worker or the intermediary may disagree with the determination you reached.

In case this happens, you should:

  • consider the reasons for disagreeing given by the other party
  • decide whether to maintain the determination or provide a new one
  • keep a record of your determinations and the reasons for them, as well as records of representations made to you

You must respond within 45 days of receiving notification that the worker or agency disagrees with your employment status determination. During this time, you should continue to apply the rules in line with your original determination. Inform the other party of your decision regardless of your decision.

If you fail to respond within 45 days, you become responsible for the worker's tax and National Insurance contributions.

What are the misclassification risks of IR35?

If you fail to classify your worker correctly, you might be risking some serious consequences. When independent contractors are reclassified, you will probably be charged retroactive payments for pension, social contribution, and tax back payments, in addition to interest. Moreover, you might face possible jail time or punitive payment.

How Deel can help you mitigate the risks

At Deel, we help you mitigate the risks mentioned above by taking the necessary steps when working with independent contractors. From generating sample contracts reviewed by local experts, helping you verify the status of your contractor and ensuring they have a proper structure in place, to creating a workflow and environment where both parties are aware of how the relationship should be structured while providing a seamless experience.

We, of course, can't detail every feature in this article, but we are looking forward to helping you mitigate compliance risks while getting your accounting streamlined. If you want to learn more, book a free consultation with our agents.