What is IR35? IR35 rules explained
IR35 became law in 2000 via the Finance Act, and is another name for the off-payroll working rules.
The off-payroll working or IR35 rules are designed to stop contractors working as ‘disguised employees’, by taxing them at a rate similar to employment, and it affects all contractors who do not meet HMRC’s definition of self-employed.
What is HMRC’s definition of self-employed?
According to the gov.uk website, if someone is self-employed “most of the following are true”:
- they put in bids or give quotes to get work
- they’re not under direct supervision when working
- they submit invoices for the work they’ve done
- they’re responsible for paying their own National Insurance and tax
- they do not get holiday or sick pay when they’re not working
- they operate under a contract (sometimes known as a ‘contract for services’ or ‘consultancy agreement’) that uses terms like ‘self-employed’, ‘consultant’ or an ‘independent contractor’
HMRC states that they will take an overall view of a contractor's position to determine whether they will be deemed 'employed' under the rules, therefore it is extremely important that any contracts should also reflect your working practices.
IR35 employment status indicators
There are three key factors taken into consideration when assessing a contractor’s working arrangement to determine whether they are ‘inside IR35’ or ‘outside IR35’.
In simple terms, here are the three key IR35 status indicators and what they mean:
1. Right of Substitution
Substitution is the ability of a contractor providing a contracted service to supply a replacement contractor to carry out the service under the contract.
2. Mutuality of Obligations (MOO)
MOO means that in order for an employment relationship to exist, there must be an obligation on a work-provider to provide work and an obligation on the individual to carry out the work.
Control looks at whether a worker is truly independent when working under a contract between it and the end-client. The more factors showing independence of work behaviour, choice of how and when to work etc., indicate a scenario where IR35 does not apply.
For more information, you can have a look at our IR35 status guides or read HMRC’s guide to determining employment status here.
What do ‘inside IR35’ and ‘outside IR35’ mean?
• Inside IR35
If you are determined to be ‘inside IR35’ this means you do not meet HMRC’s definition of self-employed. You are considered an employee of the end client and are therefore are subject to PAYE, requiring you to ensure that you are paying the appropriate taxes.
Find out more about what being inside IR35 means here.
• Outside IR35
If you are determined to be ‘outside IR35’ this means you meet HMRC’s definition of self-employed. You are considered a genuine business and can operate and be engaged with as an independent contractor. You would be paid gross for any work completed.
Find out more about what being outside IR35 means here.
How has IR35 changed in recent years?
IR35 has undergone a number of changes over the past few years and continues to evolve to this day. Here are some of the changes we have seen since April 2017.
• Public sector IR35 reform in April 2017
In April 2017, IR35 reform in the public sector came into force. This meant that IR35 status was no longer decided by the contractor, but was decided by public sector clients instead. If the client decided that the contractor was inside IR35, the contractor company would be taxed at source, exactly as if it were an employee.
• Private sector IR35 reform in April 2021
In April 2021, IR35 reform in the private sector came into force, after being delayed by a year due to the covid-19 pandemic. As with the public sector IR35 reforms, this meant IR35 status was no longer decided by contractors working in the private sector, but by their clients instead.
• Will IR35 reforms be repealed from April 2023?
Unfortunately the IR35 reforms will not be repealed from April 2023.
In the Mini-Budget of September 2022, the UK government announced fundamental changes to IR35, repealing the public sector IR35 reforms of April 2017 and the private sector IR35 reforms of April 2021. However, on 17th October 2022 the new chancellor Jeremy Hunt reversed the government’s pledge to repeal IR35 reform.
You can read a full timeline of how IR35 has changed since it came into force in 2000 here.
Further IR35 information
More information on IR35 can be found here: IR35 information
Do you need your contract reviewed for IR35? IR35 contract reviews
Do you need IR35 insurance? IR35 insurance