Contractor and IR35-Intermediaries legislation (known as IR35) is the tax and National Insurance contributions legislation that may apply if you’re working for a client through an intermediary.
If IR35 applies, all payments to the intermediary are treated as your employment income and the intermediary must pay any tax and National Insurance contributions due. It ensures that you pay roughly the same amount of tax and National Insurance contributions as if you’d been directly employed by the client.
The intermediary is always responsible for ensuring compliance with the IR35 legislation when it applies. As a director of your limited company or a member of your partnership, you must ensure compliance with all relevant legislation, and take responsibility for determining whether IR35 applies for each of your engagements or not.
There can be significant consequences of ignoring IR35 legislation. Interest and penalties may be charged on any additional tax and National Insurance contributions due as a result of an HM Revenue and Customs (HMRC) enquiry into your situation.
Worker (you) director, self-employed worker, freelancer, consultant, contractor
Intermediary individual, partnership, limited company (sometimes called a service company or personal service company)
Client end client, client business, end-user, engager
- or your intermediary, or client are abroad
- work in the construction industry
- are an office-holder
- work with your partner or spouse
- are engaged by a charitable organisation
If IR35 doesn’t apply to a particular engagement you should keep clear and relevant records of the terms and conditions for at least 3 years, including contracts. If your contract changes or you start a new engagement, you must always reassess whether IR35 does apply.
If IR35 applies, find out what you need to do.
When IR35 will apply
If you’re engaged by a client though your own intermediary, the client must consider your employment status to ensure they fulfil any tax and National Insurance contributions liabilities of their own. If the contract or particular working arrangement shows that you’re effectively engaged directly by the client as an office-holder or employee, then the client will be responsible for operating PAYE for you. There may be penalties if the client doesn’t operate PAYE when appropriate. If a client contracts directly with you, the client will always be responsible for operating PAYE for you, even if payment for your services is made to your intermediary.
Services provided through an agency
If you provide services to an ‘employer’ through a third party (often an employment agency) so that, technically, you are not a direct employee of either, the agency legislation may apply. If it does, you must comply with this legislation rather than IR35. If the agency is based outside the UK the client may be liable to operate PAYE and make the appropriate deduction, returns and payments of tax and National Insurance contributions instead.
Services provided through a managed service company (MSC)
If you provide your services to end clients through an intermediary company which is controlled and run by a third party service provider, then the MSC legislation may apply. If it does, you must comply with this legislation rather than IR35
Worker client relationship
IR35 looks at the underlying relationship between you (the worker) and the client for each contract or engagement. The facts of each engagement determine whether IR35 applies and not any label, description or job title. You need to assess what that relationship would be (your employment status) if there were no intermediary involved. You and your intermediary must assess the underlying relationship between you and your client for each of your contracts individually. You must assess them again if they change.
There’s usually a contract between your intermediary and the client, either directly or through another party, such as a staffing agency, a recruitment agency or an employment business. There can be more than one agency in the chain to supply your services to a client.
- you personally perform services for another person or business (the client) or are under an obligation to do so
- the services are provided to the client through an intermediary such as a limited company or partnership which does not meet the definition of a MSC
- your services are supplied as either an office-holder of the client or if you had provided the services directly to the client under a contract between you and the client, your employment status would be regarded as being that of an employee or office-holder of the client
- the specific IR35 conditions of liability for your intermediary are met
You can find further information about IR35 in the Employment Status Manual. It can also help you assess your hypothetical employment status were there no personal service company or partnership involved in the arrangements.
Intermediary is a limited company: conditions of liability
- you (or an associate, or a member of your family – which can include an unmarried partner) control, or have the ability to control, more than 5% of the ordinary share capital of the company directly or indirectly
- you (or an associate, or a member of your family – which can include an unmarried partner) have, or are entitled to acquire, rights to receive more than 5% of any dividends from the company
- if your company is a close company – and you (or an associate, or a member of your family – which can include an unmarried partner) possess, or are entitled to acquire, rights that entitle you to more than 5% of the assets that would be available for distribution if the company is wound up
- you or an associate receive, or could receive, payments or benefits directly or indirectly from the intermediary which aren’t employment income, but could reasonably be taken to represent payment for the services you provide to clients
Intermediary is a partnership: conditions of liability
- you (or your family – which can include an unmarried partner) are entitled to 60% or more of the profits of the partnership
- all or most of the partnership’s income comes from providing services to a single client, or to a single client and its associates
- the profit sharing arrangements in the partnership are designed to ensure that you receive an amount based on the payments received for your services to clients for engagements within IR35 legislation.
You’re an office-holder
- as an office-holder of the client
- if you’d be regarded as an office-holder of the client if you provided your services under a contract directly between you and the client
The IR35 National Insurance contributions legislation has always applied to office-holders. However, before 6 April 2013, the IR35 tax legislation generally only applied to office-holders if they would also have been regarded as an employee if engaged directly by the client.
- simply because you’re a director of your own personal service company
- just because your job title refers to you as an ‘officer’ but you don’t actually hold an office
- when a company engages another firm to provide services (such as auditor) and there’s no requirement for your personal services
You work in the construction industry
If you’re a subcontractor working in the construction industry through a limited company or partnership both the IR35 legislation and the Construction Industry Scheme (CIS) can apply to you. For example, this can happen where you would be regarded as an employee of the client if there was no limited company or partnership acting as an intermediary.
To prevent tax and National Insurance contributions being paid on the same amount of earnings twice within the CIS and IR35 schemes special rules apply.