A Contractor’s Guide to off Payroll Working (IR35) Rules

Ir35 Changes Came Into Effect on April 6 2021

As a contractor, the recent off-payroll working (IR35) changes on 6 April 2021 have probably left you feeling confused about how you will work under these new rules. The recent changes mean that medium and large-sized private sector end clients bear the legal responsibility of deciding the IR35 status of all contractors they use.

These changes can be challenging to understand, so we will summarise how IR35 affects you as a contractor in this blog.

Who Is an End Client, and Who Is a Fee Payer?

Before we explain how IR35 affects you, it is good to define the terms end client and fee payer under IR35 rules.

End client/hirer – This is the organisation or company that requires your skills and services as a contractor. The end client would be the company where you go to complete your shifts or provide your services. The responsibility of deciding your IR35 status and how you should be paid will now solely rest with the end client.

Fee payer or agency – A fee payer would be the party paying you or your limited company as you complete your assignment. In most cases, this would be your recruitment agency, but it can also be your end client in cases where the end client pays you directly. Under the new IR35 rules, feepayers would be responsible for deducting income tax and National Insurance Contributions (NICs) while also paying Employers NI and apprenticeship levy.

What Is off-Payroll Working (IR35)?

Off-payroll working, or IR35, is the UK anti-tax avoidance legislation put in place to stop tax avoidance by disguised employees. Disguised employees are individuals being paid through a limited company to avoid paying the right amount of tax when they are effectively a permanent employee of an end client. IR35 has been in effect in the public sector since April 2017, but with the recent changes, IR35 now applies to most of the private sector. Private-sector contractors can no longer determine how they should be paid; instead, the end client will decide your IR35 status and how you should be paid.

If an end client deems you as inside IR35, then for tax purposes, you must be paid as an employee through Pay As You Earn (PAYE) with National Insurance Contributions (NICs) and Income tax deducted before you get paid.

off-payroll working

How Do Contractors Find Out Their IR35 Status?

The end client you complete your assignment with should always inform you of your IR35 status through a Status Determination Document (SDS).

There is no set form for an SDS, but an SDS must:

  • Confirm the IR35 status for the role you are completing and why the end client has come to this determination.
  • Be determined through reasonable care as stated by HMRC.
  • Some state benefits.
  • Have a process to deal with any challenges you make towards the IR35 status they have determined.

The end client must also make sure that they:

  • Keep detailed records of your IR35 status and the reasons for their determinations.
  • Confirm if they are a medium or large private sector end client if asked.
  • Have a process to deal with any challenges you make towards the IR35 status they have determined.

What Factors Determine an IR35 Status?

Your IR35 status is determined by the end client assessing your contract and working practices while you complete your assignment. The criteria for determining IR35 status is laid out in detail on the HMRC website.

The most significant factors determining your IR35 status include:

  • Supervision, Direction and Control (SDC) – Will you be supervised or directed by an employee of the end client regarding how you carry out your work? Does the end client have a right of control over you as you complete your assignment?
  • Substitution - Are you the only person who can complete your work, or can you send someone as a substitute to complete your work?
  • Mutuality of Obligation (MOO) – Is the end-client obligated to provide you with work? Are you obligated to accept work offered by the end client?

Apart from the points shown above, other factors for determining your IR35 status include:

  • Provision of equipment - During your assignment, is the equipment required for your work provided by yourself or the end client?
  • Basis of payment - Are you paid a standard fixed wage, or do you negotiate a specific rate for the assignment you complete?
  • Right to terminate - Apart from being in breach of your working contract, does the end client have the right to terminate your assignment?
  • Financial risk – Does the end client take on all the financial risk as you complete your assignment?
  • Part and parcel of the end client company - Do you have the same staff benefits and facilities as a full-time employee of the end client?
  • Exclusivity of service and length of employment - Do you complete work for various end clients simultaneously, or do you only complete work for one end client? Has your contract with an end client been renewed regularly over time?
  • The intention of both parties - Is the intended relationship between you and the end client a relationship of employment or self-employment?

Determining your IR35 status is not a simple tick box exercise, so the end client must take reasonable care when assessing the above factors for your IR35 status.

What Is the HMRC Check Employment Status for Tax (CEST) Tool?

The Check Employment Status for Tax (CEST) tool is a free online tool provided by HMRC to give contractors and end clients clarity on the IR35 status of a contractor.

While using the CEST tool, you or the end client will choose answers to questions that best suit your working relationship and contract. Once all questions have been answered, an IR35 status determination will be provided on-screen.

Using HMRC's CEST tool is not compulsory, but HMRC will stand by the decision made by their tool if all the information entered is correct.

Although the CEST tool can provide clarity to the IR35 status of a contractor, there have been rare instances where the CEST tool has not been able to give a definitive IR35 status. To ensure reasonable care and best practice, end clients must make sure they fully understand IR35 and not solely rely on the CEST tool.

Can I Challenge My IR35 Status With the End Client?

Under the new off-payroll rules, you or your agency can challenge an IR35 status from the end client if you believe that the status is incorrect. While making your challenge, you will need to submit evidence to the end client to support your challenge.

Once you have raised your IR35 status challenge, the end client will have 45 days to consider your evidence. After assessing your challenge, the end client can overturn their original decision or provide evidence for why the status they have determined stands.

How Does Unified Payroll help with IR35?

Processing your payments and making the correct deductions can be difficult and complex for your recruitment agency to manage. As a compliant PAYE umbrella payroll service, we step in, in these situations, to take the responsibility of paying agency contractors, so you are paid compliantly and on time. By making all the correct deductions through PAYE, you can concentrate on your assignment while we take away all IR35 risk.

Contractors use our umbrella payroll company because we:

  • Make IR35 easy to understand while removing IR35 risk.
  • Are a compliant umbrella payroll company with a Chartered Institute of Payroll Professionals (CIPP) qualified payroll team.
  • Take away the hassle of payroll by employing and paying contractors, so you never have to worry about payroll admin ever again.
  • Provide employee benefits such as statutory sick pay, maternity pay, paternity pay and holiday pay while you have the freedom to complete assignments of your choice.
  • Provide references for bank loans, mortgages, and other financial applications since you are always paid through us.
  • Offer an overarching contract of employment so you can continue to be paid through us no matter what agency you choose to work through.
  • Provide exclusive access to Unified Loyalty perks where you can save hundreds of pounds with online offers and discounts at over 7,500 high street retailers.

Contact Us

If you have any questions about joining our PAYE umbrella scheme, HMRC guidelines, IR35 and AWR legislation, you can contact our expert sales team. 

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