IR35, according to the government, is nothing more than the description of one of the tax
avoidance schemes. A worker is involved in off-payroll working when they work for a client
through their own intermediary, often a personal service company (PSC), but would be an
employee if they were providing their services directly. Such workers are called ‘disguised
employees’ by HMRC.
IR35 – why the government has created IR35 regulations
Every Employer must face many costs related to hiring staff Aside from employee’s salary.
There are Employer Liability Insurance, Employer National Insurance Contribution, holidays,
Statutory Sick Pay, work clothes, tools and recently contributions towards employees’ private
It is much easier to hire another company, set one rate for the work and transfer all
responsibilities to this company. This is the reason why intermediaries preferred employing self-
employers instead of employees. It was until 2014 when the Government legislated in Finance
Bill 2014 to prevent employment intermediaries being used to avoid employment taxes by
disguising employment as self-employment. Since then, large agencies have begun to force
subcontractors to set up limited companies.
It turned out quickly that the above form of work found many followers among former employees.
Limited company allows manage finances and taxes as well as working time more effective. It
also allows clients to work for many contractors instead of one employer.
Currently, in the UK it is a very popular form of 'employment' that benefits the agencies and
subcontractors, but not the government, because they both are paying less taxes and NIC. It
causes the last drastic changes in the regulations regarding the employment of subcontractors.
Rules of IR35
The regulations impose on every subcontractor (especially work through the intermediaries) that
they have to make a test. A summary of the answers to questions should give us the answer
whether our contract is inside IR35 or outside IR35 – the test gives an answer whether we are
allowed to put costs in order to less tax or not.
If our contract is outside IR35 it means that we can payroll any amount of salary and the
remaining profit from the company can be taken as a dividend, which until recently was not taxed
If the contact is inside IR35 it means that our contract says that we are disguised employees and
all income of the limited company must be accounted for as director’s salary on payslip. The
limited company in this situation is only allowed to less income for 5% flat rate cost and
Limited company does not have right to deduct any other costs, and there is no option to take a
dividend. Of course, we do not have to mention that it is not possible to employ employees.
IR35 – questions for recognizing the status of IR35
In our work, we often meet with the client's claim that since they have limited company registered
in Companies House, it is irrefutable fact that the company is a company and not an
employment. Unfortunately IR35 regulations can ignore this fact and prove that there is no
difference between the employee J Smith and limited company J Smith.
In order to determine the status of IR35, you should answer a lot of questions based on the
contract between the company limited and intermediaries. The problem is that many companies
do not even have a written contract between the agency and their company and are unable to
answer the questions asked. Questions that are asked directly to the agency or the final
customer also most often remain unanswered, since until now it has not been in the interest of
the agency to confirm the status of the contract.
Nowadays, the agencies forced by the tax authorities present information on IR35 to their clients
often by directly answering questions about the IR35 status and also they ask for a copy of the
IR35 test before starting work.
In order to recognize the status, everyone should answer following questions:
If we independently determine where, when and how long we work and ourselves choose the
target client there is a chance that our contract is outside IR35. However, if most of the work
conditions are imposed on us, we remain under the control of the contractor, which is the most
important point of being subject to IR35 regulations.
If limited company provide only service and the building, machinery, equipment or cars does not
belong to limited company, unfortunately, we should be employed as employees. In that case,
our company is not considered to be true company, as someone else has made appropriate
investments to organize work.
Lack of costs in companies subject to IR35 is quite typical and is a big difference between
companies that independently build a customer base, assets and company value.
Often, customers are surprised that they have to pay for damage caused while working on a
limited company claiming that the 'employer' should pay for damages, however, due to IR35
regulations this may be an indication that the contract is not subject to IR35, because an
independent company should be responsible for its action and for their employees.
The transfer of responsibility to limited company is typical for outside IR35 contracts, but not
good for limited companies, because of course the holiday, sick pay cannot be paid for
contractors. Such benefits are typical only for an employee relationship.
IR35 in public sector
From 6th April 2017, the responsibility for determining the IR35 status of a contract shifts from the
contractor to the public sector client. All companies which work in public sector has been caught by
new IR35 rules.
This meant that from April 2017 all limited companies operating in schools, hospitals, universities,
BBC, etc. work inside IR35, they pay broadly the same tax and NICs as an employee.
On March 13, 2018, many contractors heard Philip Hammond announcing the Spring Statement
awaiting confirmation that the IR35 changes will be introduced on April 1, 2019 in private sector, but
the government has decided to remain silent. They are going to announce important changes in the
Some people find no confirmation in Spring Statement as confirmation that no changes will be made
in the near future.
We will keep you informed about the changes with a public announcement, in case of doubt, please
contact our office.