IR35
Also known as: Off-payroll working rules, Intermediaries legislation, IR35 UK
IR35 (formally the off-payroll working rules) is UK tax legislation that targets "disguised employment" — situations where a worker provides services through their own intermediary company (typically a personal service company / limited company) to a client, when the actual working relationship would be employment if the intermediary did not exist. If IR35 applies, the engagement is taxed broadly as employment income.
IR35 originated in 2000 to close a tax loophole: a UK worker could pay themselves dividends from their personal limited company at lower combined tax rates than PAYE income tax + employee National Insurance. The legislation requires anyone working through an intermediary to consider whether they'd be an employee if the intermediary didn't exist. Major reforms in 2017 (public sector) and 2021 (private sector medium/large clients) shifted the determination responsibility from the contractor to the client, making client-side IR35 compliance now a major UK contractor-engagement issue.
How IR35 status is determined
HMRC applies a multi-factor test similar to general employment-status tests: control (does the client direct how, when, and where the work is done?), substitution (can the contractor send a substitute?), mutuality of obligation (is the client obligated to provide work, the contractor obligated to take it?), financial risk (does the contractor have skin in the game?), and integration (is the contractor part of the client's organization, with company email, equipment, organization chart placement?). HMRC provides the CEST tool for assessing status, though its results have been criticized.
Who determines IR35 status
- Public sector clients — always determine (since 2017)
- Private sector — medium and large clients determine status for engagements with their direct contractor intermediaries (since April 2021)
- Small private-sector clients — contractor determines their own status. "Small" defined by Companies Act size thresholds (turnover ≤£10.2M, balance sheet ≤£5.1M, employees ≤50; meet two of three for two consecutive years)
What happens if IR35 applies (inside IR35)
When an engagement is "inside IR35," the fee-payer (the entity paying the contractor's intermediary) must deduct PAYE income tax and employee National Insurance before paying. Employer National Insurance and Apprenticeship Levy are also payable. Effectively the contractor pays employment-level tax without receiving employment benefits. Many UK contractors moved to umbrella companies (PAYE arrangements) or to seeking statutory employment when IR35 applied.
Frequently asked questions
- What is IR35?
- UK tax legislation (off-payroll working rules) that targets "disguised employment" — situations where a worker uses an intermediary company but the actual working relationship would be employment if the intermediary did not exist.
- Who determines IR35 status?
- Public sector clients always determine (since 2017). Medium and large private sector clients determine for engagements with their direct contractor intermediaries (since 2021). Small private-sector clients leave the determination to the contractor.
- What happens if IR35 applies?
- The fee-payer must deduct PAYE income tax and employee National Insurance before paying the contractor's intermediary. Employer National Insurance and Apprenticeship Levy are also payable.
- Does IR35 apply outside the UK?
- No — IR35 is UK-specific. Other countries have analogous misclassification rules (US 1099 reclassification, EU member states each have variants) but IR35 itself is a UK statutory regime.