IR35 legislation – A Reminder of HMRC’s Rules for Accountants and Clients

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The 2022 year was turbulent for accountants and their clients operating personal service companies. One of the most contentious areas of the government’s announcements in the year was the repeal of IR35 legislation in the Chancellor’s ‘mini-budget’ of 23 September 2022 and the subsequent reversal of that announcement by a new Chancellor only weeks later. The uncertainty affected contractors, end-clients and accountants as they tried to keep up with the government’s announcements.

Most accountants will be familiar with the principles of the government’s ‘off payroll working’ or ‘IR35’ rules. The legislation is designed to prevent workers operating through an intermediary (usually a limited company or a partnership) which means a worker (usually a contractor)  doesn’t pay employment taxes, such as national insurance and income tax, at the source.

Workers operating through a personal service company feel they are unfairly punished by these rules, believing they do not secure the benefits of direct employment but are required to pay the same tax as an employee. End-clients who are responsible for engaging workers, and determining their employment status, are naturally reluctant to conclude an assignment is outside IR35 and risk incurring the punitive fines and penalties applied by HMRC.

There have been many high profile cases where the decision on the employment status of an individual has rested on an HMRC Tribunal’s interpretation of the detailed IR35 rules. The payment of back taxes can run into millions of pounds, as some high profile TV presenters have found to their cost.

Here is a reminder of the various tests HMRC applies in deciding the employment status of an individual operating through an intermediary.

The key tests applied by HMRC to establish the employment status of an assignment

IR35 rules are relevant to:

  • contractors who work on assignments through an intermediary such as a limited company or a partnership
  • end-clients who engage contractors operating via such intermediaries
  • recruitment and other agencies (such as umbrella companies) who operate as an employer to provide contractor services to an end-client.

HMRC will decide whether an assignment is inside or outside IR35 based on the following key tests.

Supervision and Control

HMRC will consider whether the individual has control over their daily work in terms of how the work is done, where the work is completed and whether the completion of the work is supervised. An individual who is self-employed would have complete freedom of choice over these aspects of an assignment. If an individual is directed by an end-client to work certain hours, in a specific place of work and report to a supervisor, they are likely to be regarded as an employee for tax purposes.

Right of Substitution

HMRC will check whether an individual must carry out the assignment personally or whether another person could carry out the assignment as a substitute when needed, and without the explicit permission of the end-client. If an end-client is engaging an individual based on the specific skills they bring to an assignment, and expects that individual to complete the work directly, they will likely be regarded as an employee of the end-client for tax purposes.

Mutuality of Obligation

If an individual is obliged to accept work offered by an end-client, or the end-client is under an obligation to offer more work, then the assignment has a Mutuality of Obligation.  HMRC will usually decide the nature of the contract is one of employment for tax purposes in such circumstances.

Other tests applied by HMRC

In addition to the key tests above, HMRC will also consider whether the worker:

  • receives any benefits from the assignment such as annual leave, sick pay or benefits in kind
  • is bearing any financial risks, by providing their own equipment or paying for their own training
  • needs to serve a notice period.

If any of these characteristics are evident in an assignment, HMRC will usually decide the engagement is one of employment and therefore inside IR35.

Importantly, HMRC will look further than any contractual agreement based on the above tests. They will look at the contract in detail and the actual working practices to determine whether any of the tests are met and an assignment is operating inside IR35. HMRC can check assignments for up to 20 years after an engagement ends, asking for the repayment of any taxes due with the scope to add up to 100% of the unpaid tax in penalties.

Why do contractors prefer to operate on contracts outside of IR35 rules?

While the government has reduced many of the incentives to operate a limited company, by gradually reducing the tax-free dividend allowance and increasing the rate of corporation tax paid by companies, there are still advantages for an individual working on contracts through a limited company.

Most directors of a limited company will take a low salary with dividends based on company profit and personal income tax status. No national insurance is paid on dividends or on a salary up to the minimum national insurance threshold. There are also cash flow advantages, as tax is paid immediately on earnings under PAYE. Tax paid by a company or self-employed individual can be deferred until it is due, usually some months after it is earned.

While tax advantages have been reduced over time, importantly, many individuals prefer to work as a contractor on a ‘gig to gig’ basis and enjoy the freedom this brings.

What are the IR35 rules now?

The government has decided the reforms of IR35 put in place in 2017 and 2021 will continue and that the rules enacted from 6 April 2021 apply. This means if an end-client is a medium or large sized private company, or a public authority such as a government department or NHS body, the end-client is responsible for determining the employment status of a worker. The personal service company operated by a contractor does not decide the employment status of these assignments. Inside IR35, employment tax must be paid by the individual at source under PAYE arrangements even though they are not an employee of the end-client and may not have access to the wider benefits of employment.

An end-client is classified as medium or large sized if it meets two of the following three criteria:

  • annual turnover of more than £10.2 million
  • balance sheet with total assets of more than £5.1 million
  • more than 50 employees.

If a contractor works with smaller end-clients who do not meet two of the above criteria, the personal service company continues to determine the IR35 status of the assignment it enters into.

There are complex rules surrounding the status of international companies or individuals operating outside of the UK and working for an end-client based in the UK. If your clients are affected by these circumstances, specialist advice may be needed, particularly around their tax residency and domicile status.

How to check employment status for tax

HMRC has published a tool known as Check Employment Status for Tax (CEST) to allow an end-client or a contractor to check if a specific engagement should be classed as employed or self-employed for tax purposes. HMRC has designed the tool to provide one of the following conclusions:

  • employed for tax purposes
  • self-employed for tax purposes
  • off-payroll working (IR35) rules apply
  • off-payroll working (IR35) rules do not apply.

You can follow this link to HMRC’s website to use the tool.

How Initor Global can help your practice

As you can see from the above, the application of IR35 rules to your clients can be complex. Many of your clients operating personal service companies will seek your advice around the IR35 status of their assignments, and that their company accounts, company tax, payroll and personal tax returns accurately reflect the tax deducted at source and other tax to be paid.

At Initor Global we can support your Practice through the preparation of annual accounts, company tax returns, payroll and annual self-assessment returns. To discuss your outsourced accounting needs in more detail, you can contact us on or visit our website at


This blog draws on information published by HMRC and other professional bodies. It is not a complete guide to IR35. Information may be subject to change and Initor Global accepts no responsibility should you decide to rely on the information we have published in this blog. Professional advice should always be taken as necessary based on your individual circumstances.