If you provide services through a limited company or intermediary, either the IR35 legislation or the off-payroll working rules might apply. These rules ensure that those working as employees pay the right taxes and receive national insurance. The main distinction between the two sets of rules lies in who must decide if they apply.
Under the off-payroll working rules, the client (also known as the engager) must determine if the rules apply. Meanwhile, under IR35, it’s your responsibility (or your intermediary’s) to assess if your contract falls within the scope of IR35 and to ensure compliance.
IR35 vs. Off-Payroll Working Rules
The type of client you’re working for determines which rules apply. If the client is a medium or large private sector company or a public sector body, they are responsible for assessing if you would be considered an employee if you provided services directly to them. In these cases, the client must deduct tax and National Insurance from payments made to your intermediary.
However, if the client is a small private sector business, your personal service company or intermediary must determine whether the engagement falls within IR35 and handle the tax obligations accordingly.
How to Identify Your Client’s Classification
To figure out if IR35 applies, you need to first confirm whether the client qualifies as a small business. A company is considered small if it meets two or more of the following conditions:
- Annual turnover of £10.2 million or less
- Balance sheet total of £5.1 million or less
- 50 or fewer employees
While this is usually easy to determine, sometimes it may be necessary to get confirmation from your client.
Ensuring IR35 Compliance
If the client is classified as a small private-sector business, you need to assess whether IR35 applies to your contract. HMRC offers the Check Employment Status for Tax (CEST) tool to help evaluate employment status (accessible at www.gov.uk/guidance/check-employment-status-for-tax).
If IR35 applies, you’ll need to calculate a deemed employment payment—the amount of employment income liable to tax and National Insurance. This must be reported to HMRC by 5th April following the tax year.
Key Steps for IR35 Compliance
- Determine the client’s size: Verify whether the client is classified as a small business by checking turnover, balance sheet totals, and employee numbers.
- Use the CEST tool: If unsure about your status, the CEST tool can clarify whether IR35 applies.
- Calculate the deemed employment payment: If IR35 applies, work out the deemed employment payment and deduct the correct tax and National Insurance.
- Report to HMRC: Ensure the necessary information is reported by the end of the tax year.
Get Help With IR35
Understanding IR35 is vital for businesses and contractors working through intermediaries. The responsibility for compliance depends on the size of the end client. Small businesses place the burden on the contractor, while medium and large businesses or public sector bodies must handle compliance.
If you need specific advice on how IR35 might affect your contracts or support in managing your tax obligations, feel free to reach out for expert assistance.
