What is IR35?

If you’re confused about the on-again-off-again reforms to the UK’s IR35 rules, you’re not alone. Read on for a clear explanation of what is (and isn’t) changing–and what it means for employers and contractors.

The IR35 off-payroll working rules are intended to make sure that if contractors work like employees, they pay income tax and national insurance like employees. Reforms in 2017 and 2021 made employers, not contractors, responsible for establishing whether a contractor was a “disguised employee”.

In the September 2022 mini-budget, Chancellor Kwasi Kwarteng announced that he would repeal the 2017 and 2021 reforms to IR35, at a total cost of £6.19 billion. But on 17 October 2022, his replacement, Jeremy Hunt, reversed this decision: the reforms will stay. This means it will still be up to employers to determine their contractors’ status.

How does IR35 work?

IR35 determines how much tax and NI contractors have to pay. If a contractor is offering their services through their own personal service company, but is treated like an employee by the client, they’re “inside IR35”. This means they’ll pay basically the same tax and NI as an employee.

However, being inside IR35 doesn’t entitle the contractor to the same employment rights as an employee. According to HMRC, counting as employed for tax purposes doesn’t necessarily mean you count as employed for employment rights purposes.

Why were the reforms briefly scrapped?

In July 2021, Government accounts revealed that HMRC’s enforcement of the reforms in the public sector had been riddled with costly mistakes. HMRC had sent the Department of Work and Pensions (DWP) a tax bill for £88 million over incorrect IR35 determinations.

Then, in February 2022, the National Audit Office (NAO) revealed that in total, Government departments had been billed £263 million for IR35 noncompliance–despite using HMRC's Check Employment Status for Tax tool and having the support of HMRC’s off-payroll guidance. The NAO also raised concern that the new rules didn’t provide for offsets and left some contractors paying no tax.

However, given the economic crisis and the massive cost of undoing the reforms, the new Government has decided to keep them in place, saving about £2 billion a year.

What do clients have to do?

The 2017 and 2021 reforms make End-Users (clients) responsible for deciding whether their arrangement with a contractor counts as employment for tax purposes, and for telling everyone in the contractual chain who needs to know about that decision.

If it does count as employment, whichever party in the chain pays the contractor (the Fee-Payer), will usually need to put the contractor on their payroll and account for the contractor’s tax and NI liabilities when paying their Personal Service Company (PSC).

Any medium-to-large business that fails to determine contractors’ IR35 status correctly is liable for a fine.

The complexity and cost of this has driven some clients to switch from PSC arrangements towards third-party “umbrella companies” that process pay from clients to contractors.

How we can help

Since the changes, both clients and contractors have realised they need expert advice from recruiters. Speaking to a recruitment consultant is now an essential part of finding your next contract or contractor.

We can provide specialist tools to determine IR35 status, guide clients through the correct process for hiring contractors, and provide support and information for contractors themselves.

There’s no need to worry about IR35 if you know what you’re doing. With our expertise, we can take the confusion and risk out of your IR35 decisions. If you’re uncertain of where you stand either as a client or as a contractor, get in touch today for a free chat.