What is Off-Payroll Working Rules (IR35)?

Full Definition

The off-payroll working rules, commonly known by the shorthand "IR35" (after the original 2000 press release number), are anti-avoidance tax rules aimed at contractors who supply their services through an intermediary -- typically their own personal service company (PSC) -- in circumstances where, if the intermediary were removed from the arrangement, the working relationship would look like employment rather than genuine self-employment. Where a contractor is caught "inside IR35" for an engagement, the fees for that work must be taxed broadly as if they were salary, subject to PAYE income tax and National Insurance, rather than the contractor being able to draw a mix of modest salary and dividends from their company in the more tax-efficient way generally available to genuinely self-employed contractors. Since April 2021, responsibility for determining IR35 status for engagements with medium and large private-sector clients (and all public-sector clients) shifted from the contractor's own company to the end client, who must issue a Status Determination Statement explaining whether the engagement is inside or outside IR35, using tests around control, substitution rights, and mutuality of obligation, often assessed using HMRC's Check Employment Status for Tax (CEST) tool as a starting point. Where the client determines the role is inside IR35, the fee-payer (often an agency in the contractual chain) must deduct PAYE tax and employee National Insurance from payments to the contractor's company before they reach it, broadly equivalent to being paid as an employee but without the associated employment rights such as sick pay, holiday pay, or unfair dismissal protection. Small private-sector clients are exempt from this responsibility, meaning the contractor's own company remains responsible for self-assessing IR35 status for engagements with genuinely small businesses. Worked example: a contractor working through their own limited company takes a role at a large financial services firm, working set hours under the direct supervision of a manager with no right to send a substitute; the client assesses this as inside IR35 and issues a Status Determination Statement, so the agency paying the contractor's company deducts PAYE tax and employee National Insurance from the contract fee before payment, leaving the contractor's company to pay out a net amount broadly similar to an equivalent employee's take-home pay, rather than being free to extract profit as a lower-taxed mix of salary and dividends.

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