Contact Applegrow Financial Advisors today for expert guidance on your contractor engagements and tax compliance.
Off‑payroll working rules — commonly referred to as IR35 — are designed to ensure that individuals who work like employees through intermediaries (such as personal service companies) pay broadly the same tax and NICs as regular employees. Understanding how these rules apply is vital for businesses engaging contractors and for contractors supplying services through their own company.
IR35 rules focus on the substance of the working relationship, not just the contractual label. If a contractor works in a way that resembles employment — for example, with direction, oversight, and mutual obligations — then for tax purposes the engagement may fall “inside IR35.” This means:
• The contractor’s income is treated like employment income
• Income Tax and National Insurance Contributions (NICs) apply as if the contractor were an employee
The rules aim to prevent individuals from avoiding employment taxes by using a personal service company (PSC) or another intermediary.
IR35 can affect:
• Contractors, freelancers, consultants, and interim workers who provide services through PSCs or similar companies
• Engaging organisations (clients) that hire such contractors
• Agencies or third parties when contracts are supplied through intermediaries
Since 2021, medium and large private sector and all public sector clients are responsible for determining the contractor’s IR35 status. Small clients are exempt from this responsibility — in those cases, the contractor or their PSC makes the status decision.
The key question is whether the relationship between the worker and the client is akin to employment. HMRC considers the following factors:
Who decides what work is done, how it is done, and when?
Higher control by the client suggests employment‑like engagement.
Can the contractor send someone else to do the work?
True right of substitution supports a decision that the engagement is outside IR35.
Is the client obliged to offer work, and is the contractor obliged to accept it?
Ongoing mutual obligation points toward “inside IR35.”
Does the worker supply their own tools or equipment? Genuine business inputs suggest self‑employed status.
Does the individual bear any financial risk (e.g., loss on materials, costs for mistakes)?
Greater risk supports outside IR35 status.
These and other indicators contribute to an overall status assessment — no single factor is conclusive on its own.
Where the client is responsible for status (in large/medium or public sector engagements):
• The client must make a Status Determination Statement (SDS)
• The determination must be provided to the worker and any agency involved
• If the contractor disagrees, the client must explain the reasons and follow a clear internal disagreement process
Failure to make a determination or communicate it properly can lead to penalties.
When an engagement falls inside IR35:
• Income is treated as employment income
• Tax and employee NICs are deducted at source
• Employer NICs may also apply, depending on the payment arrangements
• Pension and student loan deductions may be relevant
If inside IR35 is agreed or determined incorrectly, HMRC can raise assessments on the client, agency, or fee‑payer — often with interest, NICs, and penalties.
HMRC expects clear documentation of:
• Status assessments and supporting analysis
• Contracts and client‑consultant agreements
• Proof of substitution and working practices
• Communication and review processes
Good records support your position in case of an enquiry.
A written contract that attempts to describe an engagement as “outside IR35” is not enough on its own. HMRC examines how the relationship actually works in practice. Real day‑to‑day working arrangements must align with contract terms.
For example, if a contract says the contractor can send a substitute, but in reality only the named individual does the work, that factor carries less weight in the status decision.
Status is not static. Changes in working practices, personnel, tools, or management structure may alter the IR35 position. Clients and contractors should:
• Review status at the outset
• Check status if circumstances change
• Reassess before contract renewals
Regular review reduces risk of unexpected liabilities.
IR35 rules are complex, and incorrect assessments can lead to significant tax liabilities and penalties. Applegrow Financial Advisors can support you by:
• Carrying out detailed IR35 status assessments
• Helping you document and defend your status decisions
• Advising on contract wording that reflects genuine working practices
• Assisting with payroll and compliance when a decision falls inside IR35
• Training clients and contractors on ongoing compliance and status reviews
We help you understand your responsibilities and protect your business from unexpected tax risk.
Contact Applegrow Financial Advisors today for expert guidance on your contractor engagements and tax compliance.
