In today's ever-evolving business landscape, understanding IR35, also known as the 'off-payroll working rules,' is crucial for both companies and contractors. This blog post will delve into the key facts, updates, and strategies related to IR35. What is IR35? IR35 was first introduced in 1999 as the 35th mandate of the year by the then Inland Revenue, now known as HMRC. The legislation was signed into law on April 6, 2000, and it applies to individuals who supply their services through an intermediary, typically a Limited Company. The primary aim of IR35 is to ensure that contractors working through their limited company, who would otherwise be considered employees if the limited company were not in place, pay employment taxes and National Insurance Contributions (NICs). This is commonly referred to as being "inside IR35." History and Background Initially, contractors were responsible for determining their IR35 status. However, with the implementation of new rules in April 2017, public sector organizations became responsible for determining the IR35 status of their contractors. This shift aimed to increase compliance and reduce tax avoidance. In April 2021, the private sector reform adjusted the responsibilities so that medium and large end clients took on the legal responsibility of determining their contractors' IR35 status. When Does IR35 Apply? IR35 applies when a contractor operates through a UK-limited company, regardless of the work location. It affects contractors engaging via their limited company with public sector clients, such as local authorities, universities, and national service organizations. And currently for medium or large private sector clients, the client must meet two of the following criteria: Have an annual turnover of at least £10.2 million Have assets of at least £5.1 million Employ at least 50 staff Where the IR35 Rules Differ The IR35 reforms that came into place in April 2021 do not apply if a private sector client is considered a small company, as they fall under the small company exemption. As of April 6, 2025, the thresholds for determining a company's size for IR35 purposes have increased. This means that more medium-sized companies will fall under the small company exemption. To fall under the small company exemption a client must meet two of the following criteria: Have an annual turnover of not more than £15m (increased from £10.2m) Have assets of not more than £7.5m (increased from £5.1m) Employ no more than 50 employees If a contractor is working for a client based entirely overseas, and the client has no presence in the UK, the IR35 reforms do not apply. In both instances, the contractor is responsible for determining their own IR35 status and paying the appropriate taxes. When IR35 was introduced into the public sector, HMRC's guidance stated that, where end clients were engaging in fully contracted-out services via a third party, the end client would not need to determine the IR35 status of workers supplied by the outsourced services provider. The service provider would need to determine the status of its own contractors. Inside vs. Outside IR35 Understanding the difference between working inside and outside IR35 is essential for contractors. Outside IR35, contractors can work as self-employed and will be paid gross. Inside IR35, contractors engage via limited companies, are employed for tax purposes only, and have PAYE and National Insurance Contributions taken from their gross pay, resulting in a net salary. Some clients opt to engage contractors through an Umbrella Company to mitigate risks, as the off-payroll working rules do not apply in such cases. The Umbrella Company employs the Contractor directly, so the off-payroll working rules do not apply as the contractor is on payroll. Determination Factors Several factors can determine a contractor's IR35 status: Supervision, Direction, and Control : Can the contractor decide when, where, and how the work is completed? Substitution : Does the contractor have the option to send someone else to deliver the work if they are unavailable? The client would need to consider if they would allow the contractor to send a substitute since real-world scenarios will be considered over and above what is stated in the contract. Mutuality of Obligation : If there is no work available, is the client obliged to find some, and is the Contractor obliged to complete the work? Financial Risk : What financial risks is the contractor undertaking to deliver the project or promote their business activities? For example: Is the contractor expected to fix any mistakes they have made at their own time and expense? Does the Contractor pay for business insurances to protect them and their business activity? Part and Parcel : Will the contractor be embedded in company life? Will they have access to staff facilities, staff social events, or receive staff benefits? Responsibilities Public sector and medium and large-sized private sector clients must decide the IR35 status of an engagement and share the status determination statement (SDS) with all parties in the supply chain. All clients must take ‘reasonable care’ when determining IR35 status. HMRC defines reasonable care as acting “in a way that would be expected of a prudent and reasonable person in the client’s position.” Clients must provide a “client-led status disagreement process,” as either the recruiter or the contractor may dispute the IR35 determination. Conclusion Understanding IR35 and its implications is essential for both contractors and companies. By staying informed about the key facts, updates, and strategies, you can navigate the complexities of IR35 and ensure compliance with the regulations. About Hanover Hanover is a hybrid IT services and staffing company helping the UK Public Sector digitise and improve public services. 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